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entitled 'Retirement Income: Intergenerational Comparisons of Wealth 
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Report to the Ranking Minority Member, Subcommittee on Employer-
Employee Relations, Committee on Education and the Workforce, House of 
Representatives:

United States General Accounting Office:

GAO:

April 2003:

Retirement Income:

Intergenerational Comparisons of Wealth and Future Income:

GAO-03-429:

GAO Highlights:

Highlights of GAO-03-429, a report to Ranking Minority Member, 
Subcommittee on Employer-Employee Relations, Committee on Education 
and the Workforce, House of Representatives 

Why GAO Did This Study:

Today’s workers will rely to a large extent on Social Security, private 
pensions, and personal wealth for their retirement income. But some 
analysts question whether these sources will provide sufficient 
retirement income to maintain workers’ standards of living once they 
leave the labor force. Indeed, the Social Security trust funds are 
projected to become exhausted in 2042, at which time, unless action is 
taken, Social Security will not be able to pay scheduled benefits in 
full. 

To gain an understanding of what today’s workers might expect to 
receive in terms of retirement income, GAO was asked to examine (1) how 
the personal wealth of Baby Boom (born between 1946 and 1964) and 
Generation X (born between 1965 and 1976) workers compare with what 
current retirees had at similar ages, (2) how workers from the Baby 
Boom and Generation X compare in terms of the pension and Social 
Security benefits they can expect to receive, and (3) the likely 
distribution of pension and Social Security benefits across workers 
within the Baby Boom and Generation X.


What GAO Found:

Baby Boom and Generation X households headed by an individual aged 25 
to 34 have greater accumulated assets, adjusted for inflation, than 
current retirees had when they were the same age, but also more debt. 
Most of the large increase in assets between current retirees and the 
Baby Boom is due to increased ownership and equity in housing. 
Contributions to defined contribution pension plans play a role in 
explaining the modest increase in assets between the Baby Boom and 
Generation X, in part, because GAO’s data do not allow it to consider 
the value of benefits from defined benefit pension plans.

Workers from Generation X are estimated to have similar levels of 
retirement income in real terms (adjusted for inflation) at age 62 as 
their counterparts in the Baby Boom, but Generation X may be able to 
replace a smaller percentage of their preretirement income. Whether 
Social Security benefits for Generation X are higher or lower than 
those for the Baby Boom will depend on how the Social Security funding 
shortfall is resolved. With regard to pensions, Generation X and the 
Baby Boom are estimated to have similar levels of pension income even 
with a continued shift from defined benefit to defined contribution 
pension coverage. 

Retirement income will vary within both Generation X and the Baby Boom 
households, and certain groups will be more likely to have lower 
retirement incomes. As one might expect, given significant variation in 
workers’ earnings, if households were arrayed from lowest to highest in 
terms of estimated total retirement income, those in the top 20 percent 
would receive a substantially larger proportion of income compared with 
those in the bottom 20 percent. Retirement income is lower for the less 
educated and single women.

www.gao.gov/cgi-bin/getrpt?GAO-03-429.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Barbara D. Bovbjerg at (202) 512-7215.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Baby Boom and Generation X Workers Have More Assets and More Debt Than 
Current Retirees Had at Similar Ages:

Generation X and the Baby Boom Are Estimated to Have Similar Levels of 
Real Retirement Income, but Generation X Could Have Lower Replacement 
Rates:

The Distribution of Retirement Income Will Vary within Generations, and 
Certain Groups Will Be More Likely to Have Lower Retirement Incomes:

Concluding Observations:

Agency Comments:

Appendix I: Scope and Methodology:

Analysis of Personal Wealth:

Analysis of Simulated Retirement Income:

Appendix II: Alternative Scenarios:

Retirement Income Under the No-Sunset Pension Scenario:

Distributional Figures and Tables for the Baby Boom and for Generation 
X under Alternative Scenarios:

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Related GAO Products:

Tables:

Table 1: The Median Value of Net Worth for Households Headed by a 25-to 
34-Year Old--Differences by Homeownership, Marital Status, and 
Education:

Table 2: Median Value of Wealth-to-Income Ratios for Households Headed 
by a 25-to 34-Year Old--Differences by Homeownership, Marital Status, 
and Education:

Table 3: Median Monthly Household Retirement Income and Its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Increasing Revenues:

Table 4: Median Monthly Household Retirement Income and Its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Reducing Benefits:

Table 5: Median Monthly Household Retirement Income and Its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Reducing Benefits and Generation X Having Only DC Pension Plans:

Table 6: Median Household Replacement Rates for Baby Boom and 
Generation X:

Table 7: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for Generation X, in 2001 Dollars:

Table 8: Participation Rates by Age and Salary, 2001:

Table 9: Contribution Rates by Age and Salary, 1999:

Table 10: Average Asset Allocation Rates by Age and Investment Options, 
2000:

Table 11: Assets at Termination, 2000:

Table 12: Median Monthly Household Retirement Income and its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Increasing Revenues:

Table 13: Median Monthly Household Retirement Income and its Major 
Components, at Age 62, if Social Security Shortfall addressed by 
Reducing Benefits:

Table 14: Median Monthly Household Retirement Income and its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Reducing Benefits and Generation X Having Only DC Pension Plans:

Table 15: Median Household Replacement Rates for Baby Boom and 
Generation X:

Table 16: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for the Baby Boom, in 2001 Dollars:

Table 17: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for Generation X When All Pensions are DC Pensions, in 
2001 Dollars:

Table 18: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for Generation X with Extension of Raised Pension 
Contribution Limits, in 2001 Dollars:

Table 19: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for Generation X with Scheduled Social Security 
Benefits, in 2001 Dollars:

Figures:

Figure 1: Percentage of the Aged Receiving Income, by Source:

Figure 2: Average Weekly Earnings for Production or Nonsupervisory 
Workers, Adjusted for Inflation:

Figure 3: Labor Force Participation Rates of Married Women:

Figure 4: Estimated Private Wage and Salary Worker Participation Rates 
Under DB and DC Pension Plans:

Figure 5: Levels of Education Completed by Individuals Age 25 and Over:

Figure 6: Percentage of Households by Household Composition:

Figure 7: Median Value of Total Assets, Retirement Accounts, and 
Housing Assets, and the Percentage of Households with these Assets for 
Households Headed by a 25-to 34-Year-Old:

Figure 8: Median Value of Total Assets, Financial Assets, and 
Nonfinancial Assets, and the Percentage of Households with These Assets 
for Households Headed by a 25-to 34-Year Old:

Figure 9: Median Value of Debt and the Percentage of Households with 
Debt for Households Headed by a 25-to 34-Year Old (Total Debt, Housing 
Debt, Financial Debt, and Other Debt):

Figure 10: Median Value of Positive and Negative Net Worth and the 
Percentage of Households with Net Worth for Households Headed by a 25-
to 34-Year Old:

Figure 11: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for Generation X:

Figure 12: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for Generation X:

Figure 13: Median Monthly Household Retirement Income at Age 62 for 
Generation X by Pension Status:

Figure 14: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for Generation X:

Figure 15: Median Monthly Retirement Income at Age 62 by Gender for 
Single Person Households for Generation X:

Figure 16: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for the Baby Boom:

Figure 17: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for the Baby Boom:

Figure 18: Median Monthly Household Retirement Income at Age 62 by 
Pension Status for the Baby Boom:

Figure 19: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for the Baby Boom:

Figure 20: Median Monthly Retirement Income at Age 62 by Gender for 
Single Person Households for the Baby Boom:

Figure 21: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for Generation X When 
All Pensions Are DC Pensions:

Figure 22: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for Generation X When 
all Pensions are DC Pensions:

Figure 23: Median Monthly Household Retirement Income at Age 62 by 
Pension Status for Generation X When All Pensions Are DC Pensions:

Figure 24: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for Generation X When All Pensions Are DC 
Pensions:

Figure 25: Median Monthly Retirement Income at Age 62 by Gender for 
Single Person Households for Generation X When All Pensions are DC 
Pensions:

Figure 26: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for Generation X with 
Extension of Raised Pension Contribution Limits:

Figure 27: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for Generation X with 
Extension of Raised Pension Contribution Limits:

Figure 28: Median Monthly Household Retirement Income at Age 62 by 
Pension Status for Generation X with Extension of Raised Pension 
Contribution Limits:

Figure 29: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for Generation X with Extension of Raised 
Pension Contribution Limits:

Figure 30: Median Monthly Retirement Income at Age 62 by Gender for 
Single Person Households for Generation X with Extension of Raised 
Pension Contribution Limits:

Figure 31: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for Generation X with 
Scheduled Social Security Benefits:

Figure 32: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for Generation X with 
Scheduled Social Security Benefits:

Figure 33: Median Monthly Household Retirement Income at Age 62 by 
Pension Status for Generation X with Scheduled Social Security 
Benefits:

Figure 34: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for Generation X with Scheduled Social Security 
Benefits:

Figure 35: Median Monthly Retirement Income at Age 62 by Gender for 
Generation X for Single Person Households with Scheduled Social 
Security Benefits:

Abbreviations:

DB: defined benefit:

DC: defined contribution:

EGTRRA: Economic Growth and Tax Relief Reconciliation Act of 2001:

ERISA: Employee Retirement Income Security Act of 1974:

GEMINI: Genuine Microsimulation of Social Security and Accounts:

IRA: individual retirement account:

OASDI: Old Age, Survivor and Disability Insurance:

PENSIM: Pension Simulator:

PIA: primary insurance amount:

PSG: Policy Simulation Group:

PSID: Panel Study of Income Dynamics:

SCF: Survey of Consumer Finances:

SIPP: Survey of Income and Program Participation:

SSASIM: Social Security and Accounts Simulator:

SSI: Supplemental Security Income:

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United States General Accounting Office:

Washington, DC 20548:

April 25, 2003:

The Honorable Robert Andrews
Ranking Minority Member
Subcommittee on Employer-Employee Relations
Committee on Education and the Workforce
House of Representatives:

Dear Mr. Andrews:

Today's workers will rely to a large extent on Social Security, private 
pensions, and personal wealth for their retirement income. But some 
analysts question whether these sources will provide sufficient 
retirement income to maintain workers' standards of living once they 
leave the labor force.[Footnote 1] Indeed, the Social Security trust 
funds are projected to become exhausted in 2042, at which time, unless 
action is taken, Social Security will not be able to pay scheduled 
benefits in full.[Footnote 2] Pension coverage has remained at about 50 
percent of the workforce for decades while the composition of that 
coverage has shifted from defined benefit (DB) plans to defined 
contribution (DC) plans.[Footnote 3] As a result of this shift, an 
increasing share of the responsibility for providing for one's 
retirement income has shifted from the employer to the employee. 
Finally, workers today are saving a smaller proportion of their incomes 
than earlier generations did. Yet, if current workers are to maintain 
their standards of living and meet increasing health care costs in 
retirement, they need to save more.

These trends suggest that today's younger workers might reach 
retirement unable to maintain the standards of living they had achieved 
while working. Additionally, there may be a greater strain on 
retirement assets if younger workers spend more years in retirement due 
to greater life expectancy. To gain an understanding of what today's 
workers might expect to receive in terms of retirement income, you 
asked us to examine (1) how the wealth of Baby Boom and Generation X 
workers compares with what current retirees (pre-Baby Boom generation) 
had as young adults, (2) how workers from the Baby Boom and Generation 
X compare in terms of the pension and Social Security benefits they can 
expect to receive, and (3) the likely distribution of pension benefits 
and Social Security benefits for all workers within the Baby Boom and 
Generation X. The Baby Boom generation includes those born between 1946 
and 1964, Generation X includes those born between 1965 and 1976, and 
we define the Pre-Baby Boom generation as those born between 1925 and 
1945.

To compare wealth across all three generations, we used the Federal 
Reserve Board's Survey of Consumer Finances (SCF), a nationally 
representative database containing detailed information on assets and 
debt, and compared the ownership and median levels of different types 
of assets and debt for 25-to 34-year olds in each generation. We 
selected this age group because it is important to compare each of the 
generations at the same life-cycle stage and this is the only age group 
for which we have data on wealth for all three generations.[Footnote 4] 
This comparison enabled us to assess the extent to which the Baby Boom 
and Generation X have been able to accumulate wealth, some or all of 
which can be used to finance consumption in retirement. However, our 
wealth measure does not include the future values of Social Security or 
pensions.[Footnote 5] Therefore, to complement our analysis of the 
younger generations' wealth, we simulated future retirement income for 
the Baby Boom and Generation X. To illustrate the levels and 
distribution of retirement income that current workers can expect to 
receive at age 62, we used the Policy Simulation Group's (PSG) 
models[Footnote 6] to simulate some components of retirement income--
Social Security benefits, pension income, and the earnings of spouses 
not yet retired. Under contract to us, the PSG used Pension Simulator 
(PENSIM) to estimate pension benefits and Genuine Microsimulation of 
Social Security and Accounts (GEMINI) to estimate Social Security 
benefits for two illustrative birth cohorts--Baby Boomers born in 1955 
and Generation Xers born in 1970. These simulations are based on the 
Social Security Trustees' 2001 intermediate economic and actuarial 
assumptions. While our simulations provide estimates of future 
retirement income, there is a considerable amount of uncertainty 
involved with these estimates. Since these estimates could change 
significantly, depending on assumptions used and behavioral responses, 
they should not be considered predictions.

In order to bound our estimates of retirement income, we considered 
different scenarios for Social Security and pensions. We used two 
scenarios for estimating Social Security benefits: (1) scheduled 
benefits are paid and (2) funded benefits are paid.[Footnote 7] We also 
considered two scenarios for pension benefits, one assuming that both 
the Baby Boom and Generation X had the same DB and DC pension plan 
coverage and the other that Generation X workers with pensions had only 
DC pensions. We compared the two younger generations under these 
various scenarios because the retirement income of these younger 
generations will be affected by policy decisions on Social Security and 
pensions. Changes in Social Security and pension benefits, in turn, 
will affect the amount that the Baby Boom and Generation X need to 
save.

We conducted our work between April 2002 and April 2003 in accordance 
with generally accepted government auditing standards. A more detailed 
discussion of our scope and methodology appears in appendix I.

Results in Brief:

Baby Boom and Generation X households headed by individuals aged 25 to 
34 have greater accumulated assets, adjusted for inflation, than 
current retirees had when they were the same age, but also more debt. 
Most of the large increase in assets between current retirees and the 
Baby Boom is due to increased ownership and equity in housing. 
Contributions to DC pension plans play a role in explaining the modest 
increase in assets between the Baby Boom and Generation X, in part 
because SCF data do not reflect the value of future benefits from DB 
pension plans. Of the three groups, members of Generation X carry the 
most debt. Yet, for Baby Boom and Generation X households with positive 
net worth (assets exceed debt) at age 25 to 34, net worth is 60 percent 
greater than that of current retirees when they were the same age. 
However, particularly for Generation X, greater life expectancy may 
require more assets to cover more years in retirement and greater 
assets may also be required to support higher standards of living. 
Additionally, within each generation, some people will not do as well 
as others. Specifically, those who do not own their home, are less 
educated, or are single, have less net worth.

Our simulations suggest that Generation X workers will have similar 
levels of retirement income in real terms (adjusted for inflation) at 
age 62 as their counterparts in the Baby Boom generation, but 
Generation X may be able to replace a smaller percentage of their 
preretirement income. Whether Social Security benefits for Generation X 
are higher or lower than those for the Baby Boom generation will depend 
on how the Social Security funding shortfall is resolved. If scheduled 
benefits were maintained by increasing program revenues, then 
Generation X could receive higher Social Security benefits in constant 
dollars than the Baby Boom generation, but at the possible cost of 
higher taxes and a reduced capacity to save during their working lives. 
If benefits were reduced to levels payable by current payroll tax 
rates, then Generation X could receive somewhat lower Social Security 
benefits than the Baby Boom generation. With regard to pensions, 
Generation X and the Baby Boomers are estimated to have similar levels 
of retirement income. A continued shift from DB to DC pension coverage 
does not appear to have much effect on the relative pension income of 
Generation X and the Baby Boom. With respect to replacement rates, 
however, Generation X is estimated to be able to replace a smaller 
percentage of preretirement income than the Baby Boom. The lower 
replacement rates for Generation X might translate into a decline in 
their standard of living at retirement, absent increases in retirement 
income related to behavioral changes (e.g., increases in savings, 
working longer), or external factors (e.g., increases in rates of 
return on assets).

Retirement income will vary within both Generation X and the Baby Boom 
generation and certain groups will be more likely to have lower 
retirement incomes. As one might expect, given significant variation in 
workers' earnings, if households were arrayed from lowest to highest in 
terms of estimated retirement income, those in the top 20 percent would 
receive a substantially larger proportion of income compared with those 
in the bottom 20 percent. Retirement income is lower for the less 
educated and for single women.

Background:

Retirement income in the United States includes Social Security 
benefits, asset income, pension benefits, and earnings. Over the last 
40 years, receipt of Social Security has become almost universal while 
receipt of asset income has increased modestly, receipt of private 
pensions has tripled, and receipt of government pensions has increased 
by 50 percent. However, a smaller proportion of aged households 
received earnings in 2000 than in 1962. (See fig. 1.) All of these 
components of retirement income have been affected by the major 
regulatory, labor market, and demographic changes that have taken place 
in the last 40 years.

Figure 1: Percentage of the Aged Receiving Income, by Source:

[See PDF for image]

Note: The aged include couples and nonmarried persons age 65 or older.

[End of figure]:

Legislative changes have expanded the pension and personal saving 
options available to workers.[Footnote 8] The Employee Retirement 
Income Security Act (ERISA) of 1974 provided certain minimum standards 
and broad new protections of employee benefits plans, including 
provisions for individual retirement accounts (IRA). Subsequent 
legislation revised some provisions of ERISA, further expanding the 
possibilities for workers to have access to pension income in 
retirement and established new types of employer-sponsored pension 
plans, such as 401(k) plans.

Legislative changes have also focused on the financing problems of 
Social Security. In the late 1970s and early 1980s, legislative action 
regarding Social Security attempted to solve this financing problem by 
raising taxes, curtailing future benefits, raising the retirement age, 
and trying to increase work incentives. However, the financing of 
future Social Security benefits is still an issue, and further action 
will need to be taken to either increase the program's revenues, 
decrease its expenditures, or both.

The labor market conditions facing young workers today differ 
significantly from those facing earlier generations of workers. Changes 
in earnings, women's labor force participation, and pension coverage 
over the last 40 years have altered the context within which workers 
save for retirement. Real earnings increased throughout the 1960s, 
slowed considerably in the 1970s, remained relatively stagnant during 
the 1980s and much of the 1990s, and may have started to rise in the 
late 1990s. For some groups of workers, such as production or 
nonsupervisory workers, average weekly earnings adjusted for inflation 
declined over most of the time period following the early 1970s. (See 
fig. 2.) For young workers facing stagnant or declining real earnings, 
saving for retirement might have become more difficult than it was for 
those who entered the labor market when real earnings were growing.

Figure 2: Average Weekly Earnings for Production or Nonsupervisory 
Workers, Adjusted for Inflation:

[See PDF for image]

[End of figure]


In addition, over the last 40 years, more women have entered the labor 
force. They entered regardless of their marital status--the labor force 
participation rates of married women, for example, increased from 
32 percent in 1960 to 61 percent in 1999. (See fig. 3.) This means a 
larger share of women in younger cohorts is working and likely to 
qualify for Social Security and pensions based on their own earnings. 
This also means an increase in the share of married couple households 
that have two earners, which could increase the potential for household 
retirement saving.

Figure 3: Labor Force Participation Rates of Married Women:

[See PDF for image]

[End of figure]


The composition of pension coverage also changed during this period. 
The estimated share of private wage and salary workers participating in 
a DB plan as their primary pension plan declined from 39 percent in 
1975 to 
21 percent in 1997, while the share participating in a DC plan as their 
primary pension plan increased from 6 percent to 25 percent. (See fig. 
4.) The decline in DB pension plan coverage and the increase in DC 
pension plan coverage over the past 3 decades means that more of the 
responsibility for retirement saving has shifted to individual workers 
from employers.

Figure 4: Estimated Private Wage and Salary Worker Participation Rates 
Under DB and DC Pension Plans:

[See PDF for image]

[End of figure]


Demographic changes over the last 40 years have also altered the 
circumstances of workers as they save for retirement. Educational 
attainment, for example, has increased over time. In 1960, only about 
8 percent of the population 25 years of age and older had a college 
degree. By 1999, 25 percent of the population 25 years or older were 
college graduates. (See fig. 5.) The increase in educational attainment 
over time could facilitate increased saving among those younger workers 
who attain higher education. The composition of households has also 
changed over this period with the share of households headed by a 
married couple decreasing. In 1960, 74 percent of all households were 
comprised of married couple families. By 1999 this had fallen to 53 
percent. At the same time, the percentage of one-person households 
increased from 13 percent to 26 percent of all households. (See fig. 
6.) Median incomes are typically lower for families headed by a single 
female or for single person households. In addition, life expectancy 
has increased across the generations.[Footnote 9] The greater life 
expectancy of the younger generations could mean that the retirement 
income of the Baby Boom and Generation X would need to support a larger 
number of years.

Figure 5: Levels of Education Completed by Individuals Age 25 and Over:

[See PDF for image]

[End of figure]


:

Figure 6: Percentage of Households by Household Composition:

[See PDF for image]

[End of figure]


The retirement security of today's workers will also be affected by 
changes in the cost and provision of health care. Over the last 40 
years, the provision of health benefits has become more expensive for 
employers as generous benefits have combined with higher utilization 
rates, a growing elderly population, and a rapidly increasing cost of 
service. In response to these increased costs, many employers have 
begun to limit the health benefits provided, either by terminating 
their plans, restricting benefits, or reducing their share of the 
premium. As a result, future retirees are likely to pay more of the 
costs of their health care. Consequently, today's workers might have to 
work longer, save more, or both, to ensure sufficient access to health 
benefits. In addition to paying more for privately sponsored health 
benefits, today's current workers might also pay more in retirement for 
Medicare. Medicare costs are continuing to rise with the result that 
either benefits will have to be reduced or monthly premiums will have 
to be increased.

Given all these demographic changes, as well as regulatory and economic 
changes, analysis of retirement income is increasingly dependent on 
good estimates, which in turn require adequate data. In a recent report 
on needed improvements in retirement income data, we identified data 
improvements that experts say are a priority for the study of 
retirement income.[Footnote 10] In particular, experts cited data from 
employers on employee benefits, as well as linkages between individual 
and household surveys and administrative data, as being helpful for 
estimating future retirement income.

Baby Boom and Generation X Workers Have More Assets and More Debt Than 
Current Retirees Had at Similar Ages:

Baby Boom and Generation X households headed by individuals aged 25 to 
34 have greater accumulated assets, adjusted for inflation, than 
current retirees had when they were the same age but they also have 
more debt. The large increase in assets between current retirees--the 
Pre-Baby Boom generation--and the Baby Boom is due mainly to increases 
in home equity and increases in the rate of home ownership. The modest 
increase in assets between the Baby Boom and Generation X can be 
accounted for in large part by the increase in the ownership and value 
of DC retirement accounts, because SCF data do not reflect the value of 
benefits from DB pension plans.[Footnote 11] While the percentage of 
households with debt has changed very little across the generations, 
the real total debt levels have more than doubled between current 
retirees and Generation X workers. Yet, for most young Baby Boom and 
Generation X households, assets exceed debts and the net worth of these 
households with positive net worth is 60 percent greater than that of 
current retirees at similar ages. However, particularly for Generation 
X, greater life expectancy may require more assets to cover more years 
in retirement and greater assets may also be required to support higher 
standards of living. Within each generation, the distribution of net 
worth across households is affected by economic and demographic 
characteristics. Specifically, those who do not own their own home, are 
less educated, or are single, have less in net worth.

Increases in Home Equity and Ownership are Responsible for Most of the 
Increase in Assets Across the Generations:

For households headed by a 25-to 34-year old, both the median value of 
total assets (in 1998 dollars) and the percentage of households with 
assets increased across the generations.[Footnote 12] (See fig. 7.) The 
median value of total assets for the Baby Boom and Generation X is more 
than 50 percent greater than that for the Pre-Baby Boom 
generation.[Footnote 13] While our analysis indicates that asset levels 
increase across the generations, it does not take into account the 
expectation of rising standards of living.[Footnote 14] Generation X, 
for example, could have greater assets than those of previous 
generations and still feel that these assets are insufficient for the 
lifestyle they want or expect.

For households headed by a 25-to 34-year old, the increase in assets 
across the generations can be attributed mainly to housing and DC 
retirement accounts. (See fig. 7.) As we have noted, our measure of 
assets does not include the value of benefits from DB pension plans 
and, to the extent that a larger percentage of the Pre-Baby Boom and 
the Baby Boom than Generation X is covered by DB plans, will 
underestimate the true value of assets for the Pre-Baby Boom and the 
Baby Boom relative to Generation X. The large increase in total asset 
accumulation between the Pre-Baby Boom and the Baby Boom is largely due 
to increases in home equity and increases in the rate of home 
ownership. The median value of housing assets increased from $72,890 
for the Pre-Baby Boom to $78,583 for the Baby Boom, while the 
percentage of households owning their own home increased from 39 to 45 
percent. The modest increase in total asset accumulation between the 
Baby Boom and Generation X can be accounted for in large part by the 
increase in the ownership and value of retirement accounts. The median 
value of DC retirement accounts increased from $2,947 for the Baby Boom 
to $8,003 for Generation X, while the percentage of households with 
retirement accounts increased from 
20 percent to 46 percent. The increased percentage of households with 
retirement accounts reflects changes in the types of pension plans 
offered by employers. Between 1983 and 1997, the percentage of workers 
covered by primary DC pension plans, under which the worker has a 
retirement account, increased from 11 percent to 25 percent while the 
percentage of workers covered by DB pension plans declined from 35 
percent to 21 percent.

Figure 7: Median Value of Total Assets, Retirement Accounts, and 
Housing Assets, and the Percentage of Households with these Assets for 
Households Headed by a 25-to 34-Year-Old:

[See PDF for image]

Note: GAO analysis based on data from the Survey of Consumer Finances. 
The median for housing assets is larger than the median for total 
assets because these medians come from two different distributions. 
Total assets include bank accounts and automobiles as well as housing, 
so the distribution of the value of total assets ranges from assets 
with relatively low values, such as bank accounts and other financial 
assets, to assets with relatively high values, such as houses. The 
distribution for housing assets includes only those households owning a 
home, whereas the distribution for total assets includes all households 
with any type of asset, including those who do not own homes.

[End of figure]:

Financial and nonfinancial assets contribute only modestly to the 
increase in total assets across the generations. (See fig. 8.) 
Financial assets include savings accounts, mutual funds, and stocks and 
bonds while nonfinancial assets include vehicles, business interests, 
and nonresidential real estate. The median value of financial assets 
varies between less than $2,000 for the Pre-Baby Boom generation and 
$4,000 for the Baby Boom. A greater percentage of households in the 
younger cohorts have financial assets than was the case for current 
retirees. The median value of nonfinancial assets is greater than that 
for financial assets in each of the generations and has increased 
across the cohorts. While the ownership of nonfinancial assets 
increased for the Baby Boom, relative to current retirees, it decreased 
for Generation X relative to both the Baby Boom and current retirees.

Figure 8: Median Value of Total Assets, Financial Assets, and 
Nonfinancial Assets, and the Percentage of Households with These Assets 
for Households Headed by a 25-to 34-Year Old:

[See PDF for image]

Note: GAO analysis based on data from the Survey of Consumer Finances.

[End of figure]:

The degree to which the younger cohorts will be able to add to the 
assets that we observe when they are ages 25 to 34 will be affected by 
a number of demographic and economic factors. Individuals have control 
over some of these factors. For example, they can determine how much 
education they receive, how long they work, whether both spouses in a 
couple work, how much they save while they are working, and whether 
they stay married or get divorced. On the other hand, individuals have 
no direct control over the rate of growth of real wages, the 
performance of the overall economy, the rate of return on financial 
assets, changes in housing prices, shifts in pension coverage and 
generosity of benefits, the state of the health care system, changes in 
life expectancy, and the resolution to the funding shortfall for Social 
Security and Medicare. One of the resolutions to the funding shortfall 
for both Social Security and Medicare is to increase the payroll tax 
that employees and employers pay. An increase in the payroll tax, of 
course, reduces the amount of an individual's disposable income 
available to both consume and save. On the other hand, if individuals 
expected Social Security benefits to be reduced, they might increase 
their personal saving in order to offset this reduction in benefits. 
Likewise, increases in life expectancy may also require increased 
saving in order to provide for a greater number of years in retirement 
or might induce people to work longer.

The Younger Generations, Especially Generation X, Have Higher Levels of 
Debt Than Current Retirees Did at Similar Ages:

For households headed by a 25-to 34-year old, overall debt levels 
increase across the generations. (See fig. 9.) The median level of debt 
for the Baby Boom is 38 percent greater than that for the Pre-Baby Boom 
generation while Generation X's median level of debt is 146 percent 
greater than that of the Pre-Baby Boom generation and 78 percent 
greater than that of the Baby Boom. The percentage of households with 
debt changed very little, however, remaining at roughly 83-84 percent 
across the generations. Thus, those households that go into debt are 
going into debt more deeply with each new generation.

The increase in debt levels between the Baby Boom and Generation X was 
due largely to increases in housing debt.[Footnote 15] The median value 
of housing debt increased between the Baby Boom and Generation X by 61 
percent. The percentage of households with housing debt changed very 
little between these two generations, however, remaining at roughly 40 
percent.

Figure 9: Median Value of Debt and the Percentage of Households with 
Debt for Households Headed by a 25-to 34-Year Old (Total Debt, Housing 
Debt, Financial Debt, and Other Debt):

[See PDF for image]

Note: GAO analysis based on data from the Survey of Consumer Finances. 
The median for housing debt is larger than the median for total debt 
because these medians come from two different distributions. Total debt 
includes credit card and installment debt as well as housing debt. 
Because the distribution of the value of total debt includes relatively 
low levels of nonhousing debt as well as the higher levels of housing 
debt, the median will be lower than the median for housing debt. 
Nonhousing debt includes debt for other residential property, such as 
vacation homes, debt for nonresidential real estate, business debt, 
credit card debt, and installment loans. Other debt includes loans 
against pensions, loans against life insurance, and margin loans.

[End of figure]

The amount of debt carried by a household will affect the value of its 
net worth. For households headed by a 25-to 34-year old, the percentage 
of households with positive net worth and the median value of positive 
net worth increased between the Pre-Baby Boom and Generation X; 
however, the median value of negative net worth is also much higher for 
Generation X. (See fig. 10.) The median value of net worth for 
households with positive net worth increased by 60 percent between the 
Pre-Baby Boom and the two younger generations. The percentage of 
households with negative net worth is smaller for the two younger 
generations than for current retirees when they were young. However, 
the median value of net worth for households with negative net worth is 
about four times larger for Generation X than for the Baby Boom or the 
Pre-Baby Boom.

Figure 10: Median Value of Positive and Negative Net Worth and the 
Percentage of Households with Net Worth for Households Headed by a 25-
to 34-Year Old:

[See PDF for image]

Note: GAO analysis based on data from the Survey of Consumer Finances. 
Net worth is defined as assets minus debt. If assets are greater than 
debt, the household has positive net worth. If debt is greater than 
assets, the household has negative net worth. Therefore, the positive 
and negative net worth columns will not sum to total net worth since 
they are based on different distributions.

[End of figure]:

Within Each Generation, the Value of Net Worth Is Lower for Those Who 
Do Not Own Their Own Home, Are Less Educated, or Are Single:

The younger generations in general have experienced an increase in net 
worth relative to current retirees at the same age, with the Baby Boom 
having a median net worth three times that of the older generation and 
Generation X having a median net worth two and a half times that of 
current retirees. However, there are some groups within these cohorts 
that have not benefited as much as others. (See table 1.) For example, 
the median net worth for Baby Boom and Generation X homeowners is 
between $17,000 and $35,000 greater than that for Pre-Baby Boom 
homeowners; for nonhomeowners, net worth between the older and younger 
cohorts differs by only $2,300 to $3,700. Median net worth has 
increased across the cohorts for all education levels, but much less so 
for those without a high school degree. Both single headed households 
and households headed by a married couple have seen increases in net 
worth; however, the increases have been much smaller for single headed 
households. These trends have increased the disparity in net worth 
within the younger generations compared to the Pre-Baby Boom.

Table 1: The Median Value of Net Worth for Households Headed by a 25-to 
34-Year Old--Differences by Homeownership, Marital Status, and 
Education:

In 1998 dollars.

Homeowners; Median: Pre-Baby Boom (1962): $25,594; Median: Baby Boom 
(1983): $60,521; Median: Generation X (1998): $43,100.

Nonhomeowners; Median: Pre-Baby Boom (1962): 982; Median: Baby Boom 
(1983): 4,699; Median: Generation X (1998): 3,300.

Less than high school; Median: Pre-Baby Boom (1962): 815; Median: Baby 
Boom (1983): 4,658; Median: Generation X (1998): 2,500.

High school graduate; Median: Pre-Baby Boom (1962): 10,044; Median: 
Baby Boom (1983): 17,195; Median: Generation X (1998): 17,920.

College graduate; Median: Pre-Baby Boom (1962): 23,953; Median: Baby 
Boom (1983): 36,569; Median: Generation X (1998): 30,020.

Married; Median: Pre-Baby Boom (1962): 9,165; Median: Baby Boom (1983): 
31,677; Median: Generation X (1998): 34,501.

Not married; Median: Pre-Baby Boom (1962): 0; Median: Baby Boom (1983): 
7,160; Median: Generation X (1998): 5,750.

All households; Median: Pre-Baby Boom (1962): $6,072; Median: Baby Boom 
(1983): $19,504; Median: Generation X (1998): $15,500.

Source: GAO analysis based on data from the Survey of Consumer Finances.


[End of table]

Another measure of the well-being of different generations is the ratio 
of net worth, or wealth, to income. Median ratios of wealth to income 
for households headed by a 25-to 34-year old are presented in table 2. 
The Baby Boom and Generation X have higher wealth-to-income ratios than 
current retirees had at similar ages. This suggests that households in 
the younger generations have been able to accumulate more wealth than 
was the case for current retirees. The ratios also reflect the 
differences across demographic groups within generations. Within each 
generation, ratios of wealth to income are higher for the well-
educated, the married, and homeowners.

Table 2: Median Value of Wealth-to-Income Ratios for Households Headed 
by a 
25-to 34-Year Old--Differences by Homeownership, Marital Status, and 
Education:

Homeowner; Median: Pre-Baby Boom (1962): 0.641; Median: Baby Boom 
(1983): 1.343; Median: Generation X (1998): 1.044.

Nonhomeowners; Median: Pre-Baby Boom (1962): 0.052; Median: Baby Boom 
(1983): 0.167; Median: Generation X (1998): 0.151.

Less than high school; Median: Pre-Baby Boom (1962): 0.029; Median: 
Baby Boom (1983): 0.216; Median: Generation X (1998): 0.159.

High school graduate; Median: Pre-Baby Boom (1962): 0.278; Median: Baby 
Boom (1983): 0.525; Median: Generation X (1998): 0.586.

College graduate; Median: Pre-Baby Boom (1962): 0.510; Median: Baby 
Boom (1983): 0.799; Median: Generation X (1998): 0.743.

Married; Median: Pre-Baby Boom (1962): 0.261; Median: Baby Boom (1983): 
0.755; Median: Generation X (1998): 0.742.

Not married; Median: Pre-Baby Boom (1962): 0.000; Median: Baby Boom 
(1983): 0.299; Median: Generation X (1998): 0.268.

All households; Median: Pre-Baby Boom (1962): 0.214; Median: Baby Boom 
(1983): 0.562; Median: Generation X (1998): 0.523.

Source: Federal Reserve Board.

Note: GAO analysis based on data from the Survey of Consumer Finances.

[End of table]:

Generation X and the Baby Boom Are Estimated to Have Similar Levels of 
Real Retirement Income, but Generation X Could Have Lower Replacement 
Rates:

In our simulations, Generation X and the Baby Boom[Footnote 16] have 
similar levels of retirement income in real terms (adjusted for 
inflation). Social Security benefit levels for Generation X and the 
Baby Boom will depend on how the Social Security funding shortfall is 
resolved. The shift to greater DC pension coverage does not have much 
effect on the pension income of Generation X relative to the Baby Boom. 
However, replacement rates for Generation X are estimated to be lower 
than for the Baby Boom under each scenario we considered, suggesting 
retirement income for Generation X may not keep up with the rising 
standard of living, absent increases in other sources of retirement 
income, or increases in rates of return.

Cross-generational Comparisons of Retirement Income Levels Will Be 
Affected by the Resolution to the Social Security Funding Shortfall:

Our simulations suggest that Generation X will have real retirement 
income[Footnote 17] that is similar or somewhat higher than the Baby 
Boom, depending on how the Social Security funding shortfall is 
resolved.[Footnote 18] If the shortfall is resolved by increasing the 
program's revenues[Footnote 19] to maintain scheduled benefits, then 
Generation X is estimated to have somewhat higher real retirement 
income at age 62 than the Baby Boom generation. (See table 3.) Because 
our simulations assume that real earnings increase over time,[Footnote 
20] Generation X would have higher Social Security benefits than the 
Baby Boom. However, if the shortfall is resolved through gradual 
benefit reductions over time,[Footnote 21] then Generation X is 
estimated to have real retirement income levels at age 62 that are more 
similar to those of the Baby Boom. (See table 4.) Because the benefit 
reductions increase over time, they would have more impact on 
Generation X than on the Baby Boom, leading to slightly lower Social 
Security benefits for Generation X relative to the Baby Boom.

Table 3: Median Monthly Household Retirement Income and Its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Increasing Revenues:

Retirement income; Baby Boom: $3,147; Generation X: $3,365.

Pension income (DB and DC); Baby Boom: $962; Generation X: $942.

Social Security benefits; Baby Boom: $1,366; Generation X: $1,549.

Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account 
balances annuitized at retirement. Not all components of retirement 
income are shown. Pension income is measured across all individuals in 
the cohort. Median pension income for those covered by a pension is 
$1,495 for the Baby Boom and $1,440 for Generation X. In our 
simulations, the rates of return for DC pension contributions vary over 
time and by individual. Median spousal earnings for those spouses 
working are $3,295 for the Baby Boom and $3,375 for Generation X.

[End of table]:

Changes to the Social Security system could also affect other forms of 
retirement income, especially those not considered here. If program 
revenues were increased by raising Social Security payroll taxes, then 
individuals would have less disposable income to save for retirement. 
This could take the form of decreases in personal saving or lower 
contributions to DC pension plans. Instead, if general revenues were 
used, the funding of other programs could be affected, which could 
lower some individuals' income from other income support programs, such 
as Supplemental Security Income (SSI). The timing and implementation of 
the changes to the Social Security system are also relevant since 
action taken later rather than sooner would necessitate larger tax 
increases or benefit reductions and the impact on Generation X could be 
even greater.

Table 4: Median Monthly Household Retirement Income and Its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Reducing Benefits:

Retirement income; Baby Boom: $3,011; Generation X: $2,991.

Pension income (DB and DC); Baby Boom: $962; Generation X: $942.

Social Security benefits; Baby Boom: $1,234; Generation X: $1,199.

Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account 
balances annuitized at retirement. Not all components of retirement 
income are shown. Pension income is measured across all individuals in 
the cohort. Median pension income for those covered by a pension is 
$1,495 for the Baby Boom and $1,440 for Generation X. In our 
simulations, the rates of return for DC pension contributions vary over 
time and by individual. Median spousal earnings for those spouses 
working are $3,295 for the Baby Boom and $3,375 for Generation X.

[End of table]:

Generation X and the Baby Boom May Have Similar Levels of Pension 
Income Even When Pension Coverage Shifts from DB to DC Plans:

Generation X and the Baby Boom are estimated to have similar levels of 
pension income when our simulations assume that the rate of DB and DC 
pension coverage is constant over time.[Footnote 22] (See table 4.) DC 
account balances are annuitized at retirement to facilitate 
comparisons. While Generation X's simulated higher earnings might have 
suggested higher pension income as well, they may have been too young 
to completely benefit from the strong stock market of the 1990s.The 
assumption that the rate of pension coverage is constant over time has 
not been the experience of private pensions in the United States over 
the last 25 years. DB coverage has declined, and DC coverage has 
increased.

Generation X and the Baby Boom are estimated to have similar levels of 
pension income even when our simulations assume Generation X only has 
access to DC pension plans.[Footnote 23] (See table 5.) While assuming 
that all pension coverage will shift to DC plans represents the extreme 
case, it does provide a bound to our estimates. These simulations 
provide some insight into the impact that the continuing shift from DB 
to DC pension coverage might have on retirement income for Generation 
X, since the final outcome of this shift is uncertain.

Table 5: Median Monthly Household Retirement Income and Its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Reducing Benefits and Generation X Having Only DC Pension Plans:

Retirement income; Baby Boom: $3,011; Generation X: $3,096.

Pension income (DB and DC); Baby Boom: $962; Generation X: $984.

Social Security benefits; Baby Boom: $1,234; Generation X: $1,199.

Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account 
balances annuitized at retirement. Not all components of retirement 
income are shown. Pension income is measured across all individuals in 
the cohort. Median pension income for those covered by a pension is 
$1,495 for the Baby Boom and $1,700 for Generation X. In our 
simulations, the rates of return for DC pension contributions vary over 
time and by individual. Median spousal earnings for those spouses 
working are $3,295 for the Baby Boom and $3,375 for Generation X.

[End of table]:

Replacement Rates Lower for Generation X Relative to the Baby Boom:

In our simulations, Generation X has a lower earnings replacement 
rate[Footnote 24] than the Baby Boom (see table 6) even though the Baby 
Boom and Generation X are estimated to have similar levels of 
retirement income. Our assumption of increasing earnings over time 
leads to Generation X having a lower replacement rate. The largest 
difference between the cohorts, in terms of replacement rates, occurs 
under the Social Security benefit reduction scenario since benefit 
levels are falling more for Generation X while earnings are unchanged. 
While the shift in pension coverage raises the level of retirement 
income for Generation X, it does not change the replacement 
rate.[Footnote 25]

The earnings replacement rate is an indicator of how well individuals 
are doing at maintaining their pre-retirement standard of living. While 
our estimated replacement rates do not cover all individuals in each 
generation or include all forms of retirement income, they still might 
indicate a decline in the standard of living during retirement for 
Generation X. However, this does not take into account that retirement 
income may increase because of behavioral changes or other external 
factors. Since Generation X is still relatively young, it is possible 
that some members of this cohort may change their behavior and save 
more or work longer.[Footnote 26] Also, variations in rates of return 
could be greater than expected, causing some individuals in our 
simulations to experience higher asset returns. Any of these factors 
could raise retirement income and, possibly, Generation X's replacement 
rate. If this were to occur, the difference in replacement rates 
between the Baby Boom and Generation X could be smaller than we 
estimate.

Table 6: Median Household Replacement Rates for Baby Boom and 
Generation X:

Social Security Tax Increase Scenario, Constant DB/DC; Baby Boom: 
74.6%; Generation X: 68.1%.

Social Security Benefit Reduction Scenario, Constant DB/DC; Baby Boom: 
70.7%; Generation X: 60.4%.

Social Security Benefit Reduction Scenario, Generation X only has DC; 
Baby Boom: 70.7%; Generation X: 60.2%.

Source: GEMINI/PENSIM.

Note: The replacement rate is calculated as retirement income at age 62 
divided by earnings at age 61 for retired workers who worked at age 61 
and whose spouses, if married, were the same age. Some but not all of 
the difference in replacement rates between generations may be 
explained by the difference in the normal retirement age.

[End of table]:

The Distribution of Retirement Income Will Vary within Generations, and 
Certain Groups Will Be More Likely to Have Lower Retirement Incomes:

Our simulations suggest that retirement income will vary significantly 
within both Generation X and the Baby Boom. Retirement income will also 
vary by demographic group, with income being lower for the less 
educated and single women.

The Distribution of Retirement Income Will Vary within Both Generation 
X and the Baby Boom:

Simulated retirement income will vary widely across households within 
both Generation X and the Baby Boom.[Footnote 27] For example, if 
married households in Generation X were arranged from lowest to highest 
in terms of their retirement incomes at age 62, the top 20 percent 
would receive over 40 percent of all retirement income while the bottom 
20 percent would receive less than 7 percent. (See fig. 11.)[Footnote 
28] The disparity between the top 20 percent and bottom 20 percent is 
even larger for single persons. Because retirement income is closely 
linked to earnings, which are known to vary significantly,[Footnote 29] 
this degree of variation in estimated retirement income is not 
surprising.

Figure 11: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for Generation X:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of figure]
:

When examining the sources of retirement income, simulated pension 
benefits are less evenly distributed than simulated Social Security 
benefits. Married couples in the top 20 percent in terms of pension 
benefits receive over 58 percent of all pension benefits while those in 
the bottom 20 percent receive no benefits at all, as shown for 
Generation X in figure 12. In comparison, married couples in the top 20 
percent in terms of Social Security benefits receive about 31 percent 
of all Social Security benefits, while those in the bottom 20 percent 
receive about 10 percent.

Figure 12: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for Generation X:

[See PDF for image]


Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of figure]:

Pension benefits are less evenly distributed for at least two reasons. 
First, by design, the Social Security benefit formula is more generous 
toward low-income and disabled workers, in contrast to pensions, which 
tend to play a larger role in the retirement income of higher earning 
workers.[Footnote 30] Second, some workers have no pension coverage 
while nearly all workers are covered by Social Security. In our 
simulations, 20 percent of married households and 33 percent of single 
individuals in Generation X receive no pension benefits. The median 
retirement income for married households where at least one member has 
a pension is almost twice as large as the median for married households 
where neither member has a pension. (See fig. 13.) The percentage 
difference between those with pensions and without pensions is even 
larger for single persons.

Figure 13: Median Monthly Household Retirement Income at Age 62 for 
Generation X by Pension Status:

[See PDF for image]

Note: Retirement income includes Social Security and pension benefits 
and earnings of younger spouses. Single individuals include those 
divorced, widowed, or never married at age 62. Simulations assume all 
workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of figure]:

Retirement Income Varies by Demographic Group:

Simulated retirement income varies by educational attainment, marital 
status, and gender. Simulated retirement income is lower for those with 
less education, as shown for Generation X in figure 14. The median 
retirement income for married high school dropouts is about 43 percent 
less than the median for married college graduates. The percentage 
difference between single high school dropouts and single college 
graduates is even larger. The less educated have lower Social Security 
and pension benefits due to lower lifetime earnings and lower rates of 
pension coverage. In our simulations for Generation X, 66 percent of 
married couples without high school degrees receive pension benefits as 
opposed to 87 percent of married college graduates.

Figure 14: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for Generation X:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions. Educational attainment for married couples is defined as the 
attainment of the Generation X birth cohort member--the spouse may have 
attained a different level of education.

[End of figure]:

Simulated retirement income also varies by marital status with divorced 
and never married individuals having lower retirement incomes than 
widows and married couples. (See table 7.) Median retirement incomes 
for never married persons and divorced persons are about 23 percent 
less and 32 percent less, respectively, compared to that of widows. 
Median household retirement incomes for never married persons and 
divorced persons are about 58 percent less and 63 percent less, 
respectively, compared to that of married couples. Retirement incomes 
are less for never married persons and divorced persons, even if one 
compares retirement income per household member.[Footnote 31]

Table 7: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for Generation X, in 2001 Dollars:

Never married; Household income: $1,572; Income per 
household member: $1,572.

Married; Household income: $3,757; Income per 
household member: $1,878.

Widowed; Household income: $2,047; Income per 
household member: $2,047.

Divorced; Household income: $1,389; Income per 
household member: $1,389.

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Simulations assume all 
workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of table]:

How widows and married couples compare in terms of retirement income 
depends on the measure of income used. Widows have lower median 
retirement income than married couples using household income as the 
measure, but greater median retirement income using income per 
household member as the measure. (See table 7.) Whether or not married 
couples have a higher standard of living than widows depends on how 
much they save by sharing their expenses.

Simulated retirement income is lower for single women than for single 
men, as shown for Generation X in figure 15. The median retirement 
income for single women is about 31 percent less than the median for 
single men. Again this is due to lower lifetime earnings and a lower 
rate of pension coverage. Sixty-three percent of single women in 
Generation X receive pension benefits as opposed to 74 percent of 
single men.

Figure 15: Median Monthly Retirement Income at Age 62 by Gender for 
Single Person Households for Generation X:

[See PDF for image]

Note: Retirement income includes Social Security and pension benefits. 
Single individuals include those divorced, widowed, or never married at 
age 62. Simulations assume all workers retire completely at age 62, 
Social Security benefits are reduced to funded levels, no extension of 
raised pension contribution limits, and constant rates of coverage over 
time for DB and DC pensions.

[End of figure]:

Variation in simulated retirement income suggests some members of both 
generations may be at greater risk of retiring with insufficient 
resources. Assessing the sufficiency of simulated retirement income is 
difficult because we do not simulate assets, earnings in retirement, 
and SSI and other public assistance programs. However, retirees who 
earned low earnings over their working years may not have substantial 
assets or earnings in retirement, and SSI provides only a very modest 
level of support and is restricted to the poorest of retirees.

Concluding Observations:

Our analysis of wealth at ages 25 to 34 and our simulations of Social 
Security and pension benefits at age 62 suggest that both the Baby Boom 
and Generation X are likely to have similar levels of retirement income 
in real terms, but that level may not support Generation X's future 
living standards. Our analysis also indicates that across the 
generations, similar subgroups of the population are most vulnerable in 
retirement.

The levels of retirement income that Baby Boom and Generation X workers 
will actually receive depend in part upon their own behavior, such as 
how long they work or how much they save, and in part upon factors they 
cannot control, such as the performance of the overall economy, the 
rate of return on financial investments, and changes in Social Security 
and health care financing. Individuals' behavior, and future economic 
events, may vary significantly from the assumptions underlying our 
models, especially for those workers who still have many years to work 
before retirement. In addition, estimates of future retirement income 
depend on adequate data on individuals' earnings, wealth, and pensions, 
not all of which are easily captured in existing data sets. Further, 
rising expectations about consumption, leisure and health care in 
retirement (and the costs of meeting these expectations) could require 
higher replacement rates for Generation X than for the Baby Boom in 
order to maintain the standards of living they achieved while working.

Government policy can potentially have an important effect on 
individuals' retirement income. Policies that encourage individuals to 
acquire more education and training, to work longer and to save more 
can help ensure higher retirement incomes in the future. Also, any 
reform that policymakers undertake with regard to the Social Security 
program or health care financing will have repercussions for the 
retirement income of Generation X and the younger half of the Baby 
Boom. Our work suggests the importance of all these policy actions 
reflecting a coordinated approach to future retirement income, and that 
they be made soon enough so the affected individuals will have adequate 
time to adjust their work and saving behavior accordingly. Finally, the 
continued vulnerability of certain segments of the population to 
inadequate resources at retirement suggests that successful retirement 
income policies would take potential impacts on these groups into 
consideration.

Agency Comments:

We provided a draft of this report to SSA, Labor, and Treasury. All 
three provided technical comments, which we have incorporated as 
appropriate.

We are sending copies of this report to the Social Security 
Administration, the Department of Labor, and the Department of the 
Treasury. We will also make copies available to others on request. In 
addition, the report will be available at no charge on GAO's Web site 
at http://www.gao.gov.

If you have any questions concerning this report, please contact 
Barbara Bovbjerg at (202) 512-7215. See appendix III for other contacts 
and staff acknowledgments.

Sincerely yours,

Barbara D. Bovbjerg:

Director, Education, Workforce and Income Security Issues.

Signed by Barbara D. Bovbjerg:

[End of section]

Appendix I: Scope and Methodology:

To gain an understanding of what today's workers might expect to 
receive in terms of retirement income, we compared the wealth of 
current workers with that of current retirees, at similar points in 
their lives, and estimated the pension and Social Security benefits 
that the Baby Boom and Generation X might receive. To analyze personal 
wealth we used the Survey of Consumer Finances, a survey of U.S. 
households sponsored by the Board of Governors of the Federal Reserve 
System. To analyze how workers from the Baby Boom and Generation X 
compare in terms of the retirement income they can expect to receive 
and the likely distribution across workers within the Baby Boom and 
Generation X, we simulated expected retirement income at age 62.

Analysis of Personal Wealth:

To analyze personal wealth, we used the Survey of Consumer Finances 
(SCF), a triennial survey of U.S. households sponsored by the Board of 
Governors of the Federal Reserve System with the cooperation of the 
U.S. Department of the Treasury. The SCF provides detailed information 
on U.S. households' balance sheets and their use of financial services, 
as well as on their pensions, labor force participation, and 
demographic characteristics as of the time of the interview. The SCF 
also collects information on households' total cash income, before 
taxes, for the calendar year preceding the survey. Because the survey 
is expected to provide reliable information both on assets that are 
fairly common--such as houses--as well as on assets that are owned by 
relatively few--such as closely held businesses--the SCF uses a sample 
design that includes a standard, geographically based random sample and 
a special over sample of relatively wealthy families. Weights are used 
to combine information from the two samples to make estimates for the 
full population. The 1962 SCF was conducted by the Census Bureau and 
surveyed 3,551 households. The 1983 SCF was conducted by the Survey 
Research Center of the University of Michigan and surveyed 3,824 
households. The 1998 SCF was conducted by the National Opinion Research 
Center at the University of Chicago and surveyed 4,309 households.

Using the SCF, we analyzed how marital status, education, and 
homeownership are related to the wealth of households headed by a 25-to 
34-year old. Using the 1962, 1983, and 1998 SCFs, we examined the 
ownership and level of household savings for current retirees (born 
between 1925 and 1945), the Baby Boom (born between 1946 and 1964), and 
Generation X (born between 1965 and 1976) when each generation was 25 
to 34 years old.[Footnote 32] We selected this age group because this 
is the only age group for which we have data on personal wealth in each 
of the three generations.

Our measure of personal wealth includes tax favored retirement saving, 
such as individual retirement accounts (IRA) and 401(k)s and other 
thrift type plans, as well as savings that are not specifically 
dedicated to retirement but may enhance retirement income, such as 
liquid financial assets (checking accounts, savings accounts, money 
market deposit accounts, and money market mutual funds), other 
financial assets (certificates of deposit, mutual funds, stocks, and 
bonds), housing assets, and nonhousing assets (nonresidential real 
estate, business interests, and vehicles).[Footnote 33] We also looked 
at housing liabilities and nonhousing liabilities (credit cards, 
installment loans, and other debts). For each component of personal 
wealth, we calculated the percentage of households owning that type of 
wealth as well as the median value. We looked separately at assets and 
debt and then combined them to calculate individual net worth.

For studies in which the focus is on saving or net worth, the SCF is 
preferable to other household income surveys, such as the Panel Study 
of Income Dynamics (PSID) or the Survey of Income and Program 
Participation (SIPP). The SCF has more detailed information about 
wealth holding, better distributional characteristics, less item 
nonresponse and fewer imputed variables than the PSID or the SIPP. 
However, the SCF, like all surveys, is subject to sampling errors, 
reporting errors, and nonresponse errors. Sampling errors result from 
the fact that survey estimates are based on a sample of the population 
rather than on a complete census of the population. Reporting errors 
arise because respondents may not understand what is wanted, may not 
know the information requested, or may be reluctant to reveal their 
actual income or wealth. Nonresponse errors arise when the family 
selected for participation is not available to be interviewed, either 
because they refuse to participate or cannot be contacted.

Further, the sample sizes for the SCF are relatively small compared 
with surveys such as the Current Population Survey. For our analysis, 
we are concerned with the fact that small samples are vulnerable to 
bias from observations not representative of the population as a whole. 
For all of these reasons, our numbers should be interpreted with some 
caution.

Analysis of Simulated Retirement Income:

To analyze how workers from the Baby Boom and Generation X compare in 
terms of the retirement income they can expect to receive and the 
likely distribution across workers within the Baby Boom and Generation 
X, we simulated expected retirement income at age 62. Our measure of 
retirement income consists of pension income, Social Security benefits, 
and spouse's earnings. It does not include personal savings, earnings 
in retirement, health benefits, or income from other income support 
programs (e.g., Supplemental Security Income). For our simulations, we 
used the Social Security and Accounts Simulator (SSASIM), Genuine 
Microsimulation of Social Security and Accounts (GEMINI), and Pension 
Simulator (PENSIM) simulation models. GEMINI estimated Social Security 
benefits and PENSIM estimated pension income from defined benefit and 
defined contribution plans for the 1955 birth cohort (Baby Boom) and 
the 1970 birth cohort (Generation X) and their spouses. Retirement 
income and its components were discounted to 2001 dollars, allowing us 
to make comparisons across cohorts in terms of the level of retirement 
income. However, these comparisons do not give an indication of 
standards of living in retirement. To make this comparison, we looked 
at the earnings replacement rate, calculated as retirement income at 
age 62 divided by earnings at age 61 for retired workers who worked at 
age 61 and whose spouse, if married, was the same age.

To examine the distribution of retirement income within both 
generations, we calculated the degree of variation by arranging 
households by retirement income and finding the proportion of that 
income received by each quintile.[Footnote 34] To compare groups by 
demographics, we calculated median retirement income by educational 
attainment, gender, and marital status. Due to the difference in 
household size, we performed most of the above calculations separately 
for married couples and singles--those widowed, divorced, or never 
married--at age 62. When examining retirement income by marital status 
we calculated both household income and income per household 
member.[Footnote 35]

SSASIM:

SSASIM[Footnote 36] is a Social Security policy simulation model 
developed by the Policy Simulation Group (PSG). The initial version of 
the model was developed under a series of contracts from the Social 
Security Administration as part of the 1994-96 Advisory Council on 
Social Security. SSASIM consists of two models, a macro model of 
aggregate program finances, and an embedded micro model of selected 
cohort individuals. In addition to current law policy, the model can 
simulate a variety of policy reforms, from incremental changes to 
broader structural reforms that would introduce individual accounts 
into the broader Social Security system.

GEMINI:

GEMINI[Footnote 37] is a policy microsimulation model also developed by 
the PSG. GEMINI is useful for analyzing the lifetime implications of 
Social Security policies for a large sample of people born in the same 
year and can simulate different reform features for their effects on 
the level and distribution of benefits. GEMINI uses as input birth 
cohort samples generated by PENSIM so as to represent the demographic 
and economic characteristics of historical birth cohorts. Also, GEMINI 
incorporates the same kind of Old Age, Survivor and Disability 
Insurance (OASDI) program logic as used in the micro model of SSASIM, 
with almost all assumption and policy parameters read from a SSASIM 
input database. GEMINI produces output files that contain detailed 
information about the life events and annual OASDI program experience 
of each individual in the cohort sample.

For our report, the PSG produced the GEMINI output files using the same 
1955 and 1970 birth cohorts used in PENSIM for both a scheduled and 
funded Social Security scenario (see following paragraphs for more 
details.) The PENSIM and GEMINI output files were then merged, yielding 
an output file containing yearly Social Security benefits, pension 
income, and spouse's earnings from age 62 until death for each member 
of the cohort.

PENSIM:

PENSIM[Footnote 38] is a pension policy simulation model that is being 
developed by the PSG to analyze lifetime coverage and adequacy issues 
related to employer-sponsored pension plans. The development of PENSIM 
has been funded since 1997 by the Office of Policy and Research at the 
Employee Benefits Security Administration of the U.S. Department of 
Labor. PENSIM produces a random sample of simulated life histories for 
100,000 people in a birth cohort and for their spouses who may have 
been born in a different year. The members of the birth cohort 
experience demographic and economic events, the incidence and timing of 
which vary by age, gender, education, disability, and employment 
status. The types of life events that are modeled in PENSIM include:

* demographic events (birth, death);

* schooling events (leaving school at a certain age, receiving a 
certain educational credential);

* family events (marriage, divorce, childbirth);

* disability events;

* initial job placement;

* job mobility events (earnings increases while on a job, duration of a 
job, movement to a new job, or out of the labor force);

* pension events (becoming eligible for plan participation, choosing to 
participate, becoming vested, etc.); and:

* retirement events.

For our report, we specified a DB and DC pension plan, which the PSG 
entered into PENSIM to be used with the 1955 and 1970 birth cohorts to 
simulate pension benefits for the Baby Boom and Generation X. These 
simulations were conducted under both a sunset and no sunset pension 
scenario as well a scenario where Generation X only had access to DC 
pensions (see following discussion for more details).

Defined Benefit Plan:

Our simulations assume a single type of DB pension plan for all workers 
covered by such a plan. This plan's structure is similar to the most 
common type of DB pension plan[Footnote 39] in the private 
sector.[Footnote 40]

In terms of structure, this plan has an eligibility requirement 
(consisting of a minimum age of 21 and 1 year of service) and 5 years 
cliff vesting. The plan's normal retirement age is 62 for workers with 
any years of service, and it has an early retirement option, with early 
retirement benefits beginning at age 55 for workers with 10 years of 
service. If a worker chooses to retire early there is a linear early 
retirement reduction of 5 percent per year (e.g., if a worker retires 
at age 55, he would receive 65 percent of the normal retirement 
benefit).[Footnote 41] The plan pays a monthly benefit at retirement, 
rather than a lump sum.

In terms of the calculation of benefits, the traditional DB plan 
calculates benefits using a final average pay formula, such as:

X% * average Y years earnings at the end of career or when highest * 
years of service.

Surveys of DB plans in the United States indicate that, typically, the 
percentage credit (X%) is in the range of 1-1.75 percent.[Footnote 42] 
For this report we chose 1.25 percent. The most common definition of 
final average pay is the high consecutive 5 years of earnings. 
Therefore, the formula that we use to calculate DB benefits is:

1.25% * average of high consecutive 5 years pay * years of service.

Defined Contribution Plan:

In our simulations of DC plans, all individuals covered by a DC pension 
plan are covered by the same plan. This plan's structure is similar to 
the most common type of DC pension plan[Footnote 43] in the private 
sector.[Footnote 44]

In terms of structure, this plan has an eligibility requirement 
(consisting of a minimum age of 21 and 1 year of service) and 5 year 
graded vesting.[Footnote 45] At retirement,[Footnote 46] individuals 
annuitize their account balances,[Footnote 47] with married individuals 
purchasing a joint and one-half survivor annuity and single individuals 
purchasing a single life annuity.

Employees can contribute up to 12 percent of their earnings[Footnote 
48] and the employer match 50 percent of the employees' contributions 
up to 5 percent.[Footnote 49] Employees can invest their contributions 
in their choice of equities and fixed income assets, where the fixed 
income assets will consist of Treasury bonds and corporate 
bonds.[Footnote 50] Employees who leave before retirement can choose to 
have their account balances rolled over into another retirement 
account. In our simulations, rollover decisions are based on the data 
in table 11.

Assumptions also need to be made regarding participation and 
contribution rates, and asset allocation. Tables 8-11 provide 
information on the assumptions used for each of these factors. Table 8 
provides data on participation rates by age and salary.

Table 8: Participation Rates by Age and Salary, 2001:

Age: <20; <$20,000: 17.2%; $20,000-$39,999: 44.4%; $40,000-$59,999: a; 
$60,000-$79,999: a; $80,000-$99,999: a; >$100,000: a.

Age: 20-29; <$20,000: 32.1%; $20,000-$39,999: 65.9%; $40,000-$59,999: 
78.0%; $60,000-$79,999: 91.2%; $80,000-$99,999: 93.1%; >$100,000: 
95.0%.

Age: 30-39; <$20,000: 45.2%; $20,000-$39,999: 79.5%; $40,000-$59,999: 
89.0%; $60,000-$79,999: 94.1%; $80,000-$99,999: 95.6%; >$100,000: 
97.0%.

Age: 40-49; <$20,000: 49.9%; $20,000-$39,999: 83.2%; $40,000-$59,999: 
88.0%; $60,000-$79,999: 95.0%; $80,000-$99,999: 96.8%; >$100,000: 
97.5%.

Age: 50-59; <$20,000: 57.7%; $20,000-$39,999: 85.5%; $40,000-$59,999: 
83.7%; $60,000-$79,999: 93.8%; $80,000-$99,999: 96.6%; >$100,000: 
97.9%.

Age: 60+; <$20,000: 64.0%; $20,000-$39,999: 86.7%; $40,000-$59,999: 
83.6%; $60,000-$79,999: 90.3%; $80,000-$99,999: 94.7%; >$100,000: 
96.2%.

Source: Research Report: How Well are Employees Saving and Investing in 
401(k) Plans, Hewitt Financial Services, 2001.

Note: In order to use these participation rates in our simulations, the 
salary categories listed in the table were normalized by dividing by 
the average wage index in 2001.

[A] Not applicable.

[End of table]:

Data on contribution rates by age and salary are shown in table 9.

Table 9: Contribution Rates by Age and Salary, 1999:

Age: 20-29; <$20,000: 5.1%; >$20,000-$40,000: 5.3%; >$40,000-$60,000: 
6.8%; >$60,000-$80,000: 7.4%; >$80,000-$100,000: 6.8%; >$100,000: 
4.8%.

Age: 30-39; <$20,000: 6.4%; >$20,000-$40,000: 6.2%; >$40,000-$60,000: 
6.8%; >$60,000-$80,000: 7.2%; >$80,000-$100,000: 6.9%; >$100,000: 
5.1%.

Age: 40-49; <$20,000: 6.9%; >$20,000-$40,000: 6.7%; >$40,000-$60,000: 
7.1%; >$60,000-$80,000: 7.3%; >$80,000-$100,000: 6.8%; >$100,000: 
5.0%.

Age: 50-59; <$20,000: 7.8%; >$20,000-$40,000: 7.6%; >$40,000-$60,000: 
8.3%; >$60,000-$80,000: 8.2%; >$80,000-$100,000: 7.3%; >$100,000: 
5.1%.

Age: 60+; <$20,000: 9.0%; >$20,000-$40,000: 8.5%; >$40,000-$60,000: 
9.3%; >$60,000-$80,000: 9.0%; >$80,000-$100,000: 7.9%; >$100,000: 
5.1%.

Source: Contribution Behavior of 401(k) Plan Participants, Sarah Holden 
and Jack VanDerhei, ICI Perspective, vol. 7/no. 4, October 2001 and 
Research Report: How Well Are Employees Saving and Investing in 401(k) 
Plans, Hewitt Financial Services, 2001.

Note: Since high income individuals are constrained by limits on total 
contributions within a given year, and the rates in this table fall at 
higher salary levels, we used the data for the >$60,000 to $80,000 
salary range for those salaried above $80,000. In order to use these 
contribution rates in our simulations, the salary categories listed in 
the table were normalized by dividing by the average wage index in 
1999.

[End of table]
:

Table 10 provides data on average asset allocation rates by age and 
investment options.

Table 10: Average Asset Allocation Rates by Age and Investment Options, 
2000:

Age: 20-29; Equity Funds: 77.7%; 
Balanced Funds: 8.0%; 
Bond Funds: 7.1%; 
Money Funds: 5.8%.

Age: 30-39; Equity Funds: 78.7%; Balanced Funds: 8.6%; Bond Funds: 6.4%;
Money Funds: 4.7%.

Age: 40-49; Equity Funds: 74.1%; Balanced Funds: 9.7%; 
Bond Funds: 7.7%; Money Funds: 6.1%.

Age: 50-59; Equity Funds: 67.4%; Balanced Funds: 10.8%; 
Bond Funds: 9.3%; Money 
Funds: 8.4%.

Age: 60+; Equity Funds: 55.8%; Balanced Funds: 12.5%; 
Bond Funds: 13.8%; Money Funds: 12.4%.

Source: 404(k) Plan Asset Allocation, Account Balances, and Loan 
Activity in 2000, Sarah Holden and Jack VanDerhei, ICI Perspectives, 
vol. 7/no. 5, November 2001.

Note: Because the model we used has different investment categories 
than those listed in the table, money funds were put into Treasury 
bonds, bond funds were put into corporate bonds, and balanced funds 
were split evenly between equities and corporate bonds. Percentages in 
the table are percent of account balances.

[End of table]:

Data on the distribution of assets at termination by asset levels is 
shown in table 11.

Table 11: Assets at Termination, 2000:

Assets: <$10,000; Stayed in plan: 21%; Rolled over: 48%; Cashed 
out: 32%.

Assets: $10,000-$49,999; Stayed in plan: 62%; Rolled 
over: 27%; Cashed out: 11%.

Assets: $50,000-$99,999; Stayed in plan: 69%; Rolled 
over: 27%; Cashed out: 4%.

Assets: $100,000-$199,999; Stayed in plan: 69%; Rolled 
over: 28%; Cashed out: 2%.

Assets: $200,000+; Stayed in plan: 69%; Rolled 
over: 29%; Cashed out: 2%.

Source: Building Futures: How Workplace Savings are Shaping the Future 
of Retirement, Fidelity Investments, 2001.

Note: In our simulations, if a job ends without disability or 
retirement, the individual has the choice to rollover the funds to 
another retirement account. The percentages in the cashed out category 
were used as the probability of not rolling the funds into another 
retirement account at termination. Also, the dollar amounts were 
normalized by dividing by the average wage index in 2000.

[End of table]:

Alternative Scenarios for Pensions and Social Security:

Pensions:

Our simulations considered several scenarios for pension benefits. One 
assumed that the sunset provision in the Economic Growth and Tax Relief 
Reconciliation Act (EGTRRA) of 2001 holds[Footnote 51] and the other 
that the provisions in EGTRRA, which raise the limits on both DB and DC 
plans, do not sunset.[Footnote 52] We also considered the scenario 
where the shift in coverage reached its extreme and Generation X only 
had access to DC plans.

Social Security:

Our simulations of expected Social Security benefits consider two 
different scenarios[Footnote 53] for resolving the funding shortfall. 
One scenario assumes scheduled benefits are paid while payroll taxes 
are increased to levels that support those benefits. Our scheduled 
benefits scenario increases the payroll tax once and immediately by the 
amount of the OASDI actuarial deficit as a percent of payroll so that 
benefits under the current system can continue to be paid throughout 
the simulation period.

The other scenario, the funded benefits scenario, assumes that benefits 
are reduced to levels supportable by current payroll tax rates. The 
benefit reductions used in this scenario reduce the primary insurance 
amount (PIA) formula factors by equal percentage point reductions (by 
0.319 each year for 30 years) for those newly eligible in 2005, 
subjecting earnings across all segments of the PIA formula to the same 
reduction.

Assumptions and Limitations of the Simulation Analysis:

Simulating retirement income almost 30 years into the future requires 
many assumptions and simplifications and, consequently, our simulations 
have a number of limitations. A primary limitation of our analysis is 
that our simulations do not include important components of retirement 
income such as personal savings, earnings in retirement, health 
benefits, and other public assistance programs such as SSI. Including 
personal savings might reduce retirement income for Generation X 
relative to retirement income for the Baby Boom if the post-1980 
decline in personal savings rates continues.[Footnote 54] Including 
earnings in retirement might increase Generation X's retirement income 
relative to the Boomers income if wages increase over time or if people 
in the future are more likely to work in retirement. From a 
distributional perspective, including personal savings would probably 
increase the upper quintile's share of retirement income[Footnote 55] 
while including public assistance programs such as SSI would benefit 
the bottom of the distribution. Another component of well-being in 
retirement that we do not estimate are private and public health 
benefits. Including health benefits might reduce Generation X's 
standard of living in retirement relative to the Baby Boom due to 
falling health benefits and rising health care costs over time:

An important assumption driving our results is that real wages grow 
over time. We assume real wages grow at 1.0 percent per year, following 
the 2001 Social Security Trustees Report's[Footnote 56] intermediate 
assumption. If, instead, wages stagnate as in the 1980s and 1990s, then 
retirement income for Generation X relative to retirement income for 
the Baby Boom might be lower than our estimates.

Another critical assumption is the relative rate of DB and DC pension 
coverage. Over the last 25 years pension coverage has been shifting 
from DB to DC pensions. However, due to the uncertainty in predicting 
future relative coverage rates, our simulations either assume a 
constant rate of DB and DC coverage over time or only DC coverage for 
Generation X. The likely outcome is somewhere in between.

An important omission under the scheduled Social Security benefit 
scenario is the impact of higher taxes or general revenue transfers on 
other sources of retirement income. Increased taxes or general revenue 
transfers will most likely be necessary to pay Social Security benefits 
as scheduled under current law. Tax increases might reduce saving for 
retirement and general revenue transfers might reduce funding for other 
government retirement programs such as SSI, Medicare, or Medicaid. The 
impact of tax increases may be larger for Generation X than for the 
Baby Boom because they will pay higher taxes for more years.

Another limitation is the sensitivity of estimated DC benefits to our 
assumptions about future rates of return. We assume individuals' rates 
of returns vary randomly around average rates projected by the Office 
of the Chief Actuary at SSA.[Footnote 57] If average rates of return in 
the future are significantly different, then actual DC benefits could 
differ substantially from our simulations. While the model allows 
returns to vary stochastically by individuals, it cannot capture 
fluctuations in overall market rates of return. An ill timed stock 
market downturn could result in either generation's DC benefits being 
significantly lower than simulated. Retirement income for Generation X 
could be more sensitive to future rates of return than retirement 
income for the Baby Boom, if the trend toward DC pensions continues.

Another limiting assumption is that our simulations only include one 
kind of DB and DC plan, which clearly does not capture the full 
complexity of pension plans.[Footnote 58] We attempted to choose the 
characteristics of each to be typical of today's pension plans. If they 
are not truly representative or if the characteristics of DB and DC 
plans change over time, then our results could be biased. In 
particular, the finding that the shift to DC plans only has a very 
modest effect on pension benefits may depend on our choice of plans.

While educational attainment has been increasing over time, this is not 
captured by the simulations. Both generations are assumed to achieve 
the same level of education as 35-to 44-year olds in the 1997 Current 
Population Survey. Higher levels of education for Generation X could 
increase their retirement income relative to the Baby Boom.

From a distributional perspective, the simulations are limited, in that 
they do not capture differences across the generations in the variation 
of earnings. By some measures, earnings disparity has been increasing 
over the last 20 years,[Footnote 59] which could potentially lead to 
more variation in retirement income for Generation X.

The simulations assume the same cohort life expectancies as the 2001 
Social Security Trustees Report's intermediate cost projection. Marital 
status at age 62 is calibrated to unpublished projections from the 
SSA's Office of the Chief Actuary. Assumed life expectancies may be too 
low, as some have argued that the Trustees underestimate future 
improvements in mortality rates.[Footnote 60] Increased life 
expectancies would reduce DC benefits in our simulations because 
retirees would have to pay higher prices when annuitizing their 
retirement accounts.

Our simulations of retirement income do not take taxation into account. 
Incorporating taxes would not only lower disposable income, but would 
also reduce variation in income because federal tax rates are 
progressive and because only relatively higher income households are 
required to pay tax on their Social Security benefits.

[End of section]

Finally, we are only able to simulate retirement income for two 
illustrative birth cohorts as opposed to entire generations. The 1955 
and 1970 birth cohorts may not fully capture the experiences of the 
Baby Boom and Generation X, respectively.

Appendix II: Alternative Scenarios:

For our analysis of estimated retirement income, we used two different 
scenarios for the changes to the pension limits under EGTRRA. One 
assumed that the sunset provision in EGTRRA holds and the other that 
the provisions, which raise the limits on both DB and DC plans, do not 
sunset.

Retirement Income Under the No-Sunset Pension Scenario:

The following tables show estimated retirement income under the no-
sunset pension scenario. Extending pension contribution limits beyond 
2010 increases real retirement income and replacement rates for 
Generation X relative to real retirement income and replacement rates 
for the Baby Boom.

Table 12 shows the estimated median monthly household retirement income 
at age 62 under a scheduled (tax increase) Social Security scenario and 
a constant rate of DB and DC pension coverage.

Table 12: Median Monthly Household Retirement Income and its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Increasing Revenues:

Retirement income; Baby Boom: $3,156; Generation X: $3,481.

Pension income (DB and DC); Baby Boom: $966; Generation X: $1015.

Social Security benefits; Baby Boom: $1,366; Generation X: $1,549.

Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account 
balances annuitized at retirement. Not all components of retirement 
income are shown. Pension income is measured across all individuals in 
the cohort. Median pension income for those covered by a pension is 
$1,509 for the Baby Boom and $1,589 for Generation X. The rates of 
return for DC pension contributions vary over time and by individual. 
Median spousal earnings for those spouses working are $3,295 for the 
Baby Boom and $3,375 for Generation X.

[End of table]:

Estimated median monthly household retirement income at age 62 under a 
funded (benefit reduction) Social Security scenario and a constant rate 
of DB and DC pension coverage is shown in table 13.

Table 13: Median Monthly Household Retirement Income and its Major 
Components, at Age 62, if Social Security Shortfall addressed by 
Reducing Benefits:

Retirement income; Baby Boom: $3,021; Generation X: $3,110.

Pension income (DB and DC); Baby Boom: $966; Generation X: $1015.

Social Security benefits; Baby Boom: $1,234; Generation X: $1,199.

Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account 
balances annuitized at retirement. Not all components of retirement 
income are shown. Pension income is measured across all individuals in 
the cohort. Median pension income for those covered by a pension is 
$1,509 for the Baby Boom and $1,589 for Generation X. The rates of 
return for DC pension contributions vary over time and by individual. 
Median spousal earnings for those spouses working are $3,295 for the 
Baby Boom and $3,375 for Generation X.

[End of table]

Table 14 shows the simulated median monthly household retirement income 
at age 62 under a funded (benefit reduction) Social Security scenario 
and Generation X having only DC pension coverage.

Table 14: Median Monthly Household Retirement Income and its Major 
Components, at Age 62, if Social Security Shortfall Addressed by 
Reducing Benefits and Generation X Having Only DC Pension Plans:

Retirement income; Baby Boom: $3,021; Generation X: $3,195.

Pension income (DB and DC); Baby Boom: $966; Generation X: $1065.

Social Security benefits; Baby Boom: $1,234; Generation X: $1,199.

Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account 
balances annuitized at retirement. Not all components of retirement 
income are shown. Pension income is measured across all individuals in 
the cohort. Median pension income for those covered by a pension is 
$1,509 for the Baby Boom and $1,835 for Generation X. The rates of 
return for DC pension contributions vary over time and by individual. 
Median spousal earnings for those spouses working are $3,295 for the 
Baby Boom and $3,375 for Generation X.

[End of table]:

Replacement rates for the Baby Boom and Generation X under the 
different Social Security and pension coverage scenarios are shown in 
table 15.

Table 15: Median Household Replacement Rates for Baby Boom and 
Generation X:

Social Security Tax Increase Scenario, constant DB/DC; Baby Boom: 
74.9%; Generation X: 70.9%.

Social Security Benefit Reduction Scenario, constant DB/DC; Baby Boom: 
71.0%; Generation X: 63.3%.

Social Security Benefit Reduction Scenario, Generation X only has DC; 
Baby Boom: 71.0%; Generation X: 62.5%.

Source: GEMINI/PENSIM.

Note: The replacement rate is calculated as retirement income at age 62 
divided by earnings at age 61 for retired workers who worked at age 61 
and whose spouses, if married, were the same age.

[End of table]:

Distributional Figures and Tables for the Baby Boom and for Generation 
X under Alternative Scenarios:

The distribution of simulated retirement income is very similar across 
the generations and across scenarios. For both generations and in all 
scenarios, retirement income is estimated to vary widely, pension 
benefits are less evenly distributed than Social Security benefits, and 
the less educated, single women, and those without pensions have lower 
retirement incomes.

Figures 16-20 and table 16 show the estimated distribution of 
retirement income for the Baby Boom assuming funded Social Security 
benefits, no extension of raised pension contribution limits beyond 
2010, and a constant rate of DB and DC pension coverage over time. 
These are the same assumptions used for Generation X in figures 11-15 
and table 7. We do not emphasize a comparison of the distributions 
across generations because our models do not capture differences across 
generations in the variation of earnings. By some measure earnings 
disparity has been increasing over the last 20 years,[Footnote 61] 
which may result in retirement income varying more in Generation X than 
in the Baby Boom.

Figure 16: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for the Baby Boom:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of figure]

Figure 17: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for the Baby Boom:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of figure]

Figure 18: Median Monthly Household Retirement Income at Age 62 by 
Pension Status for the Baby Boom:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions:

[End of figure]

Figure 19: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for the Baby Boom:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions. Educational attainment for married couples is defined as the 
attainment of the Baby Boom cohort member--the spouse may have attained 
a different level of education.

[End of figure]:

Figure 20: Median Monthly Retirement Income at Age 62 by Gender for 
Single Person Households for the Baby Boom:

[See PDF for image]

Note: Retirement income includes Social Security and pension benefits. 
Single individuals include those divorced, widowed, or never married at 
age 62. Simulations assume all workers retire completely at age 62, 
Social Security benefits are reduced to funded levels, no extension of 
raised pension contribution limits, and constant rates of coverage over 
time for DB and DC pensions.

[End of figure]:


Table 16: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for the Baby Boom, in 2001 Dollars:

Never married; Household income: $1,546; Income per household 
member: $1,546.

Married; Household income: $3,783; Income per household member: 
$1,891.

Widowed; Household income: $2,039; Income per household member: 
$2,039.

Divorced; Household income: $1,399; Income per household member: 
$1,399.

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of table]:

Figures 21-25 and table 17 show the estimated distribution of 
retirement income for Generation X assuming funded Social Security 
benefits, no extension of raised pension contribution limits beyond 
2010, and all pensions are DC pensions.

Figure 21: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for Generation X When 
All Pensions Are DC Pensions:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and employers with pension plans only offer DC pensions.

[End of figure]:

Figure 22: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for Generation X When 
all Pensions are DC Pensions:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and employers with pension plans only offer DC pensions.

[End of figure]:

Figure 23: Median Monthly Household Retirement Income at Age 62 by 
Pension Status for Generation X When All Pensions Are DC Pensions:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and employers with pension plans only offer DC pensions.

[End of figure]:

Figure 24: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for Generation X When All Pensions Are DC 
Pensions:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and employers with pension plans only offer DC pensions. 
Educational attainment for married couples is defined as the attainment 
of the Baby Boom cohort member--the spouse may have attained a 
different level of education.

[End of figure]

Figure 25: Median Monthly Retirement Income at Age 62 by Gender for 
Single Person Households for Generation X When All Pensions are DC 
Pensions:

[See PDF for image]

Note: Retirement income includes Social Security and pension benefits. 
Single individuals include those divorced, widowed, or never married at 
age 62. Simulations assume all workers retire completely at age 62, 
Social Security benefits are reduced to funded levels, no extension of 
raised pension contribution limits, and employers with pension plans 
only offer DC pensions.

[End of figure]:

Table 17: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for Generation X When All Pensions are DC Pensions, in 
2001 Dollars:

Never married; Household income: $1,528; Income per household 
member: $1,528.

Married; Household income: $3,892; Income per household member: 
$1,946.

Widowed; Household income: $2,145; Income per household member: 
$2,145.

Divorced; Household income: $1,358; Income per household member: 
$1,358.

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Simulations assume all 
workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, no extension of raised pension contribution 
limits, and employers with pension plans only offer DC pensions.

[End of table]

Figures 26-30 and table 18 show the estimated distribution of 
retirement income for Generation X assuming funded Social Security 
benefits, extension of raised pension contribution limits beyond 2010, 
and a constant rate of DB and DC pension coverage over time.

Figure 26: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for Generation X with 
Extension of Raised Pension Contribution Limits:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of figure]:

Figure 27: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for Generation X with 
Extension of Raised Pension Contribution Limits:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of figure]:

Figure 28: Median Monthly Household Retirement Income at Age 62 by 
Pension Status for Generation X with Extension of Raised Pension 
Contribution Limits:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.


[End of figure]:

Figure 29: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for Generation X with Extension of Raised 
Pension Contribution Limits:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions. Educational attainment for married couples is defined as the 
attainment of the Generation X birth cohort member--the spouse may have 
attained a different level of education.

[End of figure]

Figure 30: Median Monthly Retirement Income at Age 62 by Gender for 
Single Person Households for Generation X with Extension of Raised 
Pension Contribution Limits:

[See PDF for image]

Note: Retirement income includes Social Security and pension benefits. 
Single individuals include those divorced, widowed, or never married at 
age 62. Simulations assume all workers retire completely at age 62, 
Social Security benefits are reduced to funded levels, extension of 
raised pension contribution limits, and constant rates of coverage over 
time for DB and DC pensions.

[End of figure]:

Table 18: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for Generation X with Extension of Raised Pension 
Contribution Limits, in 2001 Dollars:

Never Married; Household income: $1,598; Income per household 
member: $1,598.

Married; Household income: $3,912; Income per household member: 
$1,956.

Widowed; Household income: $2,108; Income per household member: 
$2,108.

Divorced; Household income: $1,403; Income per household member: 
$1,403.

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Simulations assume all 
workers retire completely at age 62, Social Security benefits are 
reduced to funded levels, extension of raised pension contribution 
limits, and constant rates of coverage over time for DB and DC 
pensions.

[End of table]:

Figures 31-35 and table 19 show the estimated distribution of 
retirement income for Generation X assuming scheduled Social Security 
benefits, no extension of raised pension contribution limits beyond 
2010, and a constant rate of DB and DC pension coverage over time.

Figure 31: Proportion of Household Retirement Income for Each Quintile 
of the Retirement Income Distribution at Age 62 for Generation X with 
Scheduled Social Security Benefits:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
paid as scheduled under current law, no extension of raised pension 
contribution limits, and constant rates of coverage over time for DB 
and DC pensions.

[End of figure]:

Figure 32: Proportion of Household Pension Benefits and Household 
Social Security Benefits for Each Quintile of the Pension Benefit and 
Social Security Benefit Distributions at Age 62 for Generation X with 
Scheduled Social Security Benefits:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
paid as scheduled under current law, no extension of raised pension 
contribution limits, and constant rates of coverage over time for DB 
and DC pensions.

[End of figure]

Figure 33: Median Monthly Household Retirement Income at Age 62 by 
Pension Status for Generation X with Scheduled Social Security 
Benefits:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
paid as scheduled under current law, no extension of raised pension 
contribution limits, and constant rates of coverage over time for DB 
and DC pensions.

[End of figure]:

Figure 34: Median Monthly Household Retirement Income at Age 62 by 
Educational Attainment for Generation X with Scheduled Social Security 
Benefits:

[See PDF for image]

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Single individuals include 
those divorced, widowed, or never married at age 62. Simulations assume 
all workers retire completely at age 62, Social Security benefits are 
paid as scheduled under current law, no extension of raised pension 
contribution limits, and constant rates of coverage over time for DB 
and DC pensions. Educational attainment for married couples is defined 
as the attainment of the Baby Boom cohort member--the spouse may have 
attained a different level of education.

[End of figure]

Figure 35: Median Monthly Retirement Income at Age 62 by Gender for 
Generation X for Single Person Households with Scheduled Social 
Security Benefits:

[See PDF for image]

Note: Retirement income includes Social Security and pension benefits. 
Single individuals include those divorced, widowed, or never married at 
age 62. Simulations assume all workers retire completely at age 62, 
Social Security benefits are paid as scheduled under current law, no 
extension of raised pension contribution limits, and constant rates of 
coverage over time for DB and DC pensions.

[End of figure]:

Table 19: Median Monthly Household Retirement Income at Age 62 by 
Marital Status for Generation X with Scheduled Social Security 
Benefits, in 2001 Dollars:

Never Married; Household income: $1,810; Income per household 
member: $1,810.

Married; Household income: $4,190; Income per household member: 
$2,095.

Widowed; Household income: $2,306; Income per household member: 
$2,306.

Divorced; Household income: $1,622; Income per household member: 
$1,622.

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension 
benefits, and earnings of younger spouses. Simulations assume all 
workers retire completely at age 62, Social Security benefits are paid 
as scheduled under current law, no extension of raised pension 
contribution limits, and constant rates of coverage over time for DB 
and DC pensions:

[End of table]

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Alicia Puente Cackley (202) 512-7022
Barbara Smith (202) 512-3651:

Staff Acknowledgments:

In addition to those named above, the following individuals made 
significant contributions to this report: Michael J. Collins, Gordon 
Mermin, 
Janice Peterson, Brendan Cushing-Daniels, Barbara Alsip and Patrick 
DiBattista, Education, Workforce, and Income Security Issues; Grant 
Mallie, Applied Research and Methods; and Marylynn Sergent, Strategic 
Issues.

[End of section]

Related GAO Products:

Social Security Reform: Analysis of Reform Models Developed by the 
President's Commission to Strengthen Social Security. GAO-03-310. 
Washington, D.C.: January 15, 2003.

Social Security: Analysis of Issues and Selected Reform Proposals. 
GAO-03-376T. Washington, D.C.: January 15, 2003.

Private Pensions: Participants Need Information on the Risks of 
Investing in Employer Securities and the Benefits of Diversification. 
GAO-02-943. Washington, D.C.: September 6, 2002.

Private Pensions: Improving worker Coverage and Benefits. GAO-02-225. 
Washington, D.C.: April 9, 2002.

Private Pensions: Key Issues to Consider Following the Enron Collapse. 
GAO-02-480T. Washington, D.C.: February 27, 2002.

Social Security: Program's Role in Helping Ensure Income Adequacy. GAO-
02-62. Washington, D.C.: November 30, 2001.

Private Pensions: Issues of Coverage and Increasing Contribution Limits 
for Defined Contribution Plans. GAO-01-846. Washington, D.C.: September 
17, 2001.

Retirement Savings: Opportunities to Improve DOL's SAVER Act Campaign. 
GAO-01-634. Washington, D.C.: June 26, 2001.

National Saving: Answers to Key Questions. GAO-01-591SP. Washington 
D.C.: June 1, 2001.

Cash Balance Plans: Implications for Retirement Income. 
GAO/HEHS-00-207. Washington, D.C.: September 29, 2000.

Private Pensions: Implications of Conversions to Cash Balance Plans. 
GAO/HEHS-00-185. Washington, D.C.: September 29, 2000.

Social Security Reform: Implications for Private Pensions. 
GAO/HEHS-00-187. Washington, D.C.: September 14, 2000.

Pension Plans: Characteristics of Persons in the Labor Force Without 
Pension Coverage. GAO/HEHS-00-131. Washington, D.C.: August 22, 2000.

Social Security: Evaluating Reform Proposals. GAO/AIMD/HEHS-00-29. 
Washington, D.C.: November 4, 1999.

Integrating Pensions and Social Security: Trends Since 1986 Tax Law 
Changes. GAO/HEHS-98-191R. Washington, D.C.: July 6, 1998.

Social Security: Different Approaches for Addressing Program Solvency. 
GAO/HEHS-98-33. Washington, D.C.: July 22, 1998.

401(k) Pension Plans: Loan Provisions Enhance Participation But May 
Affect Income Security for Some. GAO/HEHS-98-5. Washington, D.C.: 
October 1, 1997.

Retirement Income: Implications of Demographic Trends for Social 
Security and Pension Reform. GAO/HEHS-97-81. Washington, D.C.: July 11, 
1997.


FOOTNOTES

[1] An early assessment of the sufficiency of retirement income for the 
Baby Boom was presented in a 1993 Congressional Budget Office study, 
Baby Boomers in Retirement: An Early Perspective.

[2] The projection of trust fund exhaustion in 2042 is based on the 
intermediate assumptions of the Social Security Administration's Office 
of the Chief Actuary as presented in the 2003 Trustees Report. 
According to the same assumptions, annual costs will exceed tax income 
for the Social Security trust funds starting in 2018.

[3] In DB plans, the amount of the benefit received at retirement is 
defined in advance by the plan's benefit formula, which considers such 
factors as salary and service. In a DC plan, it is the amount of the 
contribution made by the employer, employee, or both, to the worker's 
individual account that is defined. Benefits in this type of plan are 
based largely on the amount contributed but are also affected by how 
this amount is invested.

[4] Under the standard life-cycle theory of personal saving, people 
save and accumulate wealth to smooth their standard of living over 
their lifetime. Young adults entering the workforce tend to save less 
than older workers in their peak earning years. The elderly draw on 
their wealth in retirement.

[5] For individuals covered by pension plans, the SCF includes amounts 
accumulated under DC plans but does not capture the expected value of 
future benefits under DB plans. The SCF also does not capture the 
expected value of future Social Security benefits.

[6] The models--Social Security and Accounts Simulator, Genuine 
Microsimulation of Social Security and Accounts, and Pension Simulator-
-are described in appendix I.

[7] While there are many ways of achieving the same result, we chose to 
focus on the polar cases or bounds for change within the current 
system. For additional information on the benchmarks, see U.S. General 
Accounting Office, Social Security: Program's Role in Helping Ensure 
Income Adequacy, GAO-02-62 (Washington, D.C.: Nov. 30, 2001) and 
appendix I.

[8] We have issued several reports on pension coverage and 
participation: U.S. General Accounting Office, Private Pensions: 
Improving Worker Coverage and Benefits, GAO-02-225 (Washington, D.C.: 
Apr. 9, 2002); Private Pensions: Issues of Coverage and Increasing 
Contribution Limits for Defined Contribution Plans, GAO-01-846 
(Washington, D.C.: Sept. 17, 2001); Pension Plans: Characteristics of 
Persons in the Labor Force Without Pension Coverage, GAO/HEHS-00-131 
(Washington, D.C.: Aug. 22, 2000).

[9] The life expectancy for a person born in 1940 (Pre-Baby Boom) is 
61.4 years for a male and 65.7 years for a female. However, a person 
born in 1955 (Baby Boom) has a life expectancy of 66.7 years if male 
and 72.8 years if female. And someone born in 1970, and therefore a 
member of Generation X, has a life expectancy of 67.2 years if male and 
74.9 years if female.

[10] U.S. General Accounting Office, Retirement Income Data: 
Improvements Could Better Support Analysis of Future Retirees' 
Prospects, GAO-03-337 (Washington, D.C.: Mar. 21, 2003).

[11] Coverage by DB pension plans is greater for current retirees than 
for the Baby Boom or Generation X. Therefore, our measure of wealth 
underestimates their wealth relative to the wealth of the younger 
generations. To the extent that a larger percentage of the Baby Boom 
than Generation X is covered by DB plans, our measure of wealth also 
underestimates wealth for the Baby Boom relative to Generation X. 

[12] We define total assets to include assets that are specifically 
dedicated to retirement, such as IRAs, 401(k)s, 403(b)s, and other 
thrift-type plans, as well as assets that are not specifically 
dedicated to retirement but may ultimately provide retirement income, 
such as housing, financial assets (including savings accounts, mutual 
funds, stocks, and bonds), and nonfinancial assets (including vehicles, 
business interests, and nonresidential real estate). 

[13] Median values of assets are calculated only for those households 
that have assets.

[14] Comparisons across the 3 years selected, 1962, 1983, and 1998, 
need to be qualified because these years do not represent similar 
points in the business cycle. 1962 and 1998 were at the early and late 
stages, respectively, of an economic expansion, while 1983 was at the 
very end of a recession. To the extent that the position in the 
business cycle affects the real value of assets and debts, the 
comparison across generations may be misleading.

[15] Median values of debt are calculated only for those households 
that have debt.

[16] For our analyses, we considered two illustrative birth cohorts--
Baby Boomers born in 1955 and Generation Xers born in 1970.

[17] Due to the current state of the simulation models used, the 
measure of retirement income used here includes Social Security 
benefits, private pension income, and spouse's earnings. Private 
pensions include both DB and DC plans. See appendix I for a description 
of the DB and DC plans modeled.

[18] While there are many ways of achieving the same result, we chose 
to focus on the polar cases or bounds for change within the current 
system. For additional information on the benchmarks, see U.S. General 
Accounting Office, Social Security: Program's Role in Helping Ensure 
Income Adequacy, GAO-02-62 (Washington, D.C.: Nov. 30, 2001) and 
appendix I.

[19] There would be no change in benefits, but additional revenue would 
enter the system through increased taxes, general revenue transfers, or 
some similar means.

[20] Our simulations are based on the intermediate assumptions in the 
2001 Social Security Trustees Report. 

[21] There would be no change in the amount of revenue entering the 
system, instead, initial Social Security benefits would be reduced each 
year in order to make the system solvent over the 75-year projection 
period.

[22] The Economic Growth and Tax Relief Reconciliation Act of 2001 
increased the limits on contributions to DC pension plans and the 
maximum DB pension. The act also contained a sunset provision, which 
will return these limits to their pre-act levels in 2010. Legislation 
has been proposed that would eliminate the sunset provision in the act. 
Since no action has been taken on this legislation, we present our 
findings under the sunset scenario. Our simulations of a no-sunset 
scenario appear in appendix II.

[23] This result may depend on the rates of return. In our analyses, 
the mean nominal rates of return, which all returns varied around, were 
6.3 percent for Treasuries, 6.8 percent for corporate bonds, and 10 
percent for equities. See the limitations of analysis in appendix I.

[24] Our earnings replacement rate is calculated as retirement income 
at age 62 divided by earnings at age 61. Given the complexity of trying 
to calculate replacement rates at the household level when spouses are 
not the same age and beneficiaries become entitled at different ages, 
we calculated replacement rates at age 62 only for retired workers who 
had worked at age 61 and whose spouses, if married, were the same age.

[25] Our shift to all DC coverage assumed that some individuals who 
were previously covered by a DB plan would choose not to contribute to 
a DC plan. This decrease in pension coverage may offset the increase in 
pension income, leaving the median replacement rate unchanged.

[26] In order to facilitate comparison, we examined retirement income 
at age 62. However, differences in life expectancy and health status, 
particularly for Generation X, may lead to more years in retirement and 
a need for more assets. If people work longer because they are 
healthier and anticipate living longer, examining retirement income at 
62 may not capture these behavioral changes.

[27] Because projected distributions for the two generations are very 
similar we only present figures and tables for Generation X in this 
section and present the same information for the Baby Boomers in 
appendix II. The projections discussed here assume funded Social 
Security benefits, no extension of raised pension contribution limits, 
and the coverage rates for DB and DC pensions remain constant over 
time. The distributions under alternative scenarios, including 
employers only offering DC plans to Generation X, are also very similar 
(see app. II).

[28] Simulated retirement income is pre-tax and excludes important 
components of retirement income both of which affect the degree of 
variation. Examining after tax income would most likely reduce 
variation because of the progressive nature of the income tax. 
Simulated income exlcudes personal savings and SSI and other forms of 
public assistance. Including personal savings would most likely 
increase variation as there is great variation in the distribution of 
wealth. Including SSI would raise the bottom of the distribution (see 
Arthur B. Kennickell, An Examination of Changes in the Distribution of 
Wealth from 1989 to 1998: Evidence from the Survey of Consumer 
Finances, Federal Reserve Board (June 2000)).

[29] See U.S. Census Bureau, Current Population Reports: P60-204, The 
Changing Shape of the Nation's Income Distribution 1947-1998, 
(Washington, D.C.: 2000).

[30] U.S. General Accounting Office, Private Pension: Issues of 
Coverage and Increasing Contribution Limits for Defined Contribution 
Plans, GAO-01-846 (Washington, D.C.: Sept. 2001).

[31] Comparing the retirement incomes of single individuals to married 
couples is complicated by the difference in household size. Comparing 
household income without adjusting for household size makes married 
couples appear better off than they may actually be because their 
incomes must support two people instead of one. Comparing income per 
household member makes married couples look worse than they may 
actually be because it assumes there are no savings associated with 
cohabitation. In this case, regardless of the measure chosen, divorced 
and never married persons have lower median retirement incomes. 

[32] Our analysis does not include every year of each generation. We 
selected household heads age 25-34 in the SCFs corresponding to those 
born between 1928 and 1937; 1949 and 1958; and 1964 and 1973. 

[33] For individuals covered by pension plans, the SCF includes amounts 
accumulated under defined contribution plans but does not capture the 
expected value of future benefits under defined benefit plans.

[34] These calculations were repeated for pension income and Social 
Security benefits separately.

[35] Comparing the retirement incomes of single individuals to married 
couples is complicated by the difference in household size. Rather than 
arbitrarily choosing an equivalence scale, we bounded the problem by 
comparing household income and income per household member. Comparing 
household income without adjusting for household size provides an upper 
bound for the income of married couples relative to the income of 
singles because it assumes that total household living expenses for two 
people are the same as for one. Comparing income per household member 
provides a lower bound for the income of married couples relative to 
the income of singles because it assumes there are no savings 
associated with cohabitation. 

[36] For more information on SSASIM go to http://www.polsim.com/
SSASIM.html.

[37] For more information on GEMINI go to http://www.polsim.com/
GEMINI.html.

[38] For more information on PENSIM go to http://www.polsim.com/
PENSIM.html.

[39] This section relies on data from the forthcoming report, Martin R. 
Holmer and Asa M. Janney III, Policy Simulation Group. Characteristics 
of Pension Plans in the United States, 1996-98, a report prepared at 
the request of the U.S. Department of Labor, Employee Benefits Security 
Administration, Office of Policy and Research, Feb. 25, 2003.

[40] However, DB plans in the future may differ as firms have been 
increasingly switching to cash balance plans. Cash balance plans are a 
type of DB plan that combine certain features found in both DB and DC 
plans. Participants' benefits are determined by a formula, like a DB 
plan, but benefits are expressed as account balances, similar to DC 
plans. U.S. General Accounting Office, Cash Balance Plans: Implications 
for Retirement Income, GAO/HEHS-00-207 (Washington, D.C.: Sept. 29, 
2000) and Answers to Key Questions About Private Pension Plans, 
GAO-02-745SP (Washington, D.C.: Sept. 18, 2002).

[41] In our simulations all individuals retire at age 62.

[42] See U.S. Department of Labor, Bureau of Labor Statistics, Employee 
Benefits in Medium and Large Private Establishments, 1997, Bulletin 
2517 (Washington, D.C.: Sept. 1999) and U.S. General Accounting Office, 
Private Pensions: Implications of Conversions to Cash Blance Plans, 
GAO/HEHS-00-185 (Washington, D.C.: Sept. 29, 2000).

[43] This section relies on data from the forthcoming report, Martin R. 
Holmer and Asa M. Janney III, Policy Simulation Group. Characteristics 
of Pension Plans in the United States, 1996-98, a report prepared at 
the request of the U.S. Department of Labor, Employee Benefits Security 
Administration, Office of Policy and Research, Feb. 25, 2003.

[44] This plan will most likely resemble a 401(k) plan.

[45] Graded vesting implies that an employee's nonforfeitable 
percentage of the employer contributions increases over time until it 
reaches 100 percent. In our simulations the nonforfeitable percentage 
reaches 100 percent after 5 years.

[46] In our estimates all individuals retire at age 62.

[47] In our simulations all individuals are assumed to purchase a 
nominal annuity.

[48] The dollar limit on employee contributions is $11,000 for 2002, 
increasing by $1,000 per year until reaching $15,000 in 2006 and is 
then adjusted for inflation in $500 increments.

[49] By law, combined employer and employee contributions are limited 
to the lesser of $35,000 or 25 percent of compensation in 2001. 
Beginning in 2006, combined contributions will be limited to the lesser 
of $40,000 (indexed for inflation) or 100 percent of compensation.

[50] The mean nominal rates of return, which all returns varied around, 
for each asset class was 6.3 percent for Treasuries, 6.8 percent for 
corporate bonds, and 10 percent for equities, consistent with the 
assumptions used by the Office of the Chief Actuary at the Social 
Security Administration.

[51] The sunset provision would return any changes made under EGTRRA to 
their previous levels.

[52] See appendix II for figures and tables showing the level of real 
retirement income, replacement rates, and distributional statistics for 
the no sunset scenario.

[53] For additional information on the benchmarks, see U.S. General 
Accounting Office, Social Security: Program's Role in Helping Ensure 
income Adequacy, GAO-02-62 (Washington, D.C.: Nov. 30, 2001) and Social 
Security Reform: Analysis of Reform Models Developed by the President's 
Commission to Strengthen Social Security, GAO-03-310 (Washington, D.C.: 
Jan. 15, 2003).

[54] On the other hand, over the same period household net worth 
increased potentially offsetting the impact of reduced saving rates on 
eventual assets in retirements. See U.S. General Accounting Office, 
National Saving: Answers to Key Questions, GAO-01-591SP (Washington, 
D.C.: June 2001).

[55] According to one analysis of the Survey of Consumer Finances, the 
top 10 percent of the wealth distribution held nearly 70 percent of all 
wealth. Arthur B. Kennickell, An Examination of Changes in the 
Distribution of Wealth from 1989 to 1998: Evidence from the Survey of 
Consumer Finances, Federal Reserve Board (June 2000).

[56] The Board of Trustees, Federal Old-Age and Surviviors Insurance 
and Disability Insurance Trust Funds, The 2001 Annual Report of the 
Board of Trustees of the Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds (Washington, D.C.: Mar. 19, 2001).

[57] The mean nominal rates of return, which all returns varied around 
for each asset class was 6.3 percent for Treasuries, 6.8 percent for 
corporate bonds, and 10 percent for equities.

[58] We did not examine the relative generosity of our DB and DC plans. 


[59] Since the late 1960s inequality in individual earnings has been 
increasing as measured by Gini coefficients and the ratio of the 90th 
percentile to the 10th percentile. From the late 1960s to the early 
1990s inequality in household income increased as measured by the share 
of aggregate income by income quintile. U.S. Bureau of the Census, The 
Changing Shape of the Nation's Income Distribution 1947-1998, Current 
Population Reports P60-204 (Washington, D.C.: June 2000).

[60] Social Security Advisory Board, The 1999 Technical Panel on 
Assumptions and Methods: Report to the Social Security Advisory Board, 
(Nov. 1999).

[61] U.S. Bureau of the Census, The Changing Shape of the Nation's 
Income Distribution 1947-1998, Current Population Reports: P60-204 
(Washington, D.C.: June 2000).



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